Why Long-Term Debt Funds are highly attractive?

Mutual Fund

Long Term Mutual Fund investment has attracted a lot of investors who aim to gain returns. The long term debt fund returns have been really impressive along with the taxability of debt mutual funds. Following are some of the crucial reasons of why long term debt mutual fund returns are attractive-

Tax Efficient

Debt Mutual Funds in comparison with conservative investment- fixed deposits are more tax efficient. If you invest in a long term debt fund for more than 12 months, then the debt fund returns are treated as long term capital gain. So, debt fund returns after 1 year of long term mutual investment are either taxed at 20% or 10% indexation. Also, more time you invest in debt mutual funds, higher will be the indexation benefit and higher tax deduction.

In case of fixed deposits, you can withdraw the money after the maturity period of 5 to 6 years, but the income is taxed every year. But the taxability of debt mutual fund is applicable only when you redeem the fund units. You also get benefitted as the long term and short term losses are taken into account for the taxability of debt mutual funds.

Debt Fund Returns

The debt fund returns are higher than that of bonds or fixed deposits. Moreover, debt mutual funds have no lock-in period before which you cannot withdraw the amount. With a fall in interest rates, long term debt mutual funds offer a high return and capital gain. In the last 1 year, long term debt fund returns have risen by more than 12% and short term debt fund has generated 9.5% returns at an average.

High Liquidity

Investing in long term debt fund offers more liquidity than fixed deposits. You will not be charged any penalty fee if you exit from debt mutual funds, unlike fixed deposits. Also, you can redeem debt fund units partially without hampering the entire long term mutual fund investment. Moreover, you have to go through very minimum paperwork when redeeming debt mutual funds units. But you need to undergo complicated paperwork for fixed deposit withdrawal before the maturity period.

Greater Flexibility

With the benefit of taxability of debt mutual funds, you also get to enjoy great flexibility while going for long term mutual fund investment of debt funds. Instead of going for a lump-sum long term mutual fund investment, you can invest under SIP scheme on a monthly basis. Also, to yield a regular income monthly (especially for the retirees), you can opt for a systematic withdraw plan from the debt fund each month. Also, if you want to invest in an equity fund, you can invest a lump-sum in the debt fund and systematically transfer it to the equity fund of your choice. Instead of 4% interest from the savings account, debt fund returns range from 10% to 12% at an average.

Investment growth

When you invest in open-ended debt mutual funds, the investment amount grows till the time you redeem it. But if you invest in closed-ended FMPs or fixed deposits, you get the return as a whole after the maturity period. In case you withdraw money from the fixed deposit account, the money you reinvested afterward will get redeployed after a month or two. For long term debt mutual funds, the money grows every day until you redeem the whole amount.

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