Is Debt Mutual Fund Better for a Zero-Tax Bracket Individual?

When considering investment options, two prominent choices often come to mind: debt mutual funds and fixed deposits. For individuals in the zero-tax bracket, the decision between the two may not be straightforward. This article will delve into the differences and advantages of debt mutual funds over fixed deposits, highlighting specific reasons why a zero-taxed individual might prefer debt mutual funds.

Understanding Debt Mutual Funds

Debt-oriented mutual funds are investment schemes designed to preserve and generate returns for investors. They are composed primarily of fixed-income instruments such as corporate bonds, government bonds, bank certificates of deposit, treasury bills, and more. These funds are particularly suitable for risk-averse investors who prefer stability over the volatility of the stock market.

Why Choose Debt Mutual Funds over Fixed Deposits?

There are several key reasons why individuals, especially those in the zero-tax bracket, might opt for debt mutual funds over fixed deposits.

Liquidity

One significant advantage of debt mutual funds is their liquidity. Unlike fixed deposits, which require a lock-in period, debt funds allow investors to withdraw their money at any time. This flexibility is crucial for those who need access to their funds more frequently or unpredictably.

Higher Returns

Debt mutual funds typically offer higher returns, ranging from 7% to 10%, compared to the lower returns of fixed deposits, which are often around 6% to 7%. In recent years, following demonetization, SBI has reduced its interest rates on fixed deposits to 6.90% for a 1-year maturity and 6.50% for longer periods, making debt mutual funds a more attractive option.

Systematic Investment Plan (SIP) Options

Another advantage is the flexibility of investment. Debt mutual funds allow for both lump-sum and systematic investment plan (SIP) options. On the other hand, fixed deposits are generally invested in lump-sum amounts, which can be inflexible for those who prefer a more systematic approach to saving.

Tax Benefits

One of the most significant benefits for individuals in the zero-tax bracket is that no taxes or Tax Deducted at Source (TDS) are deducted from the earnings of debt mutual funds. Investments in debt mutual funds are subject to tax only when the units are sold, and the tax rate depends on the length of the investment period. In contrast, interest earned on fixed deposits is fully taxable at the investor's normal tax rate, with yearly deductions for TDS on interest income.

Recommended Debt Mutual Funds

For those interested in exploring debt mutual funds, here are a few well-regarded options:

Investing in these funds can provide a solid foundation for an individual's financial health, particularly given the advantages mentioned above.

Conclusion

For individuals in the zero-tax bracket, debt mutual funds offer a balanced approach that combines flexibility, higher returns, and tax benefits. The key is to understand the specific needs and goals of the investor before making a final decision. Whether you are focused on short-term or long-term goals, debt mutual funds can provide a valuable tool in your investment portfolio.