Debt Fund Investments are for Short Term Goals

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Such investments generate higher returns than Bank FDs, and also help save on taxes on the investment

Usha Kamble (name changed), a media professional, was recently planning to buy a health insurance policy for her family of three. She was fine with the yearly premium amount. But she was concerned that every year around the same time, she would have to cut down on some of her regular expenses to take care of the premium amount.

She was given two solutions which could lighten her burden. One was to start a recurring deposit with a bank for 12 months which, at the time of maturity, should take care of her annual premiums. The other was to start a systematic investment plan (SIP) in a debt mutual fund, from which she could redeem the premium amount each year.

The first option, a bank RD, is nearly risk-free. On the other hand, while an SIP in a debt mutual fund may not be as safe as the first one, it has the potential to earn Kamble a better tax-free return in addition to some extra returns in terms of capital appreciation too.

People in their daily lives may face a number of such situations like Kamble — it could be paying the annual tuition fee for a child, or the six-monthly payment for a coaching class, taking care of the family's annual holiday expenses, or even planning for a new car after three years.

In India, mutual funds are mostly understood as long term investment vehicles. However, the fact is there are solutions within the fund space which one can use intelligently and judiciously for better returns and also for better peace of mind. All the above mentioned expenses, and also emergency ones, can be taken care of by various debt schemes.

Most debt schemes come with some tax advantage over comparable products and, hence, chances are you would get something more than what you are actually planning for. The point to note here is that equity schemes are not suitable for meeting such short- and medium term financial goals.

For example, for meeting your short-term needs, like a payment that has to be made every six months, you can use ultra short term funds. While, for meeting your annual payments you can go for dynamic bond funds or another debt fund that does not charge exit loads for redemptions above one year. This is important because if you have to pay an exit load (which some of the debt funds charge), then your total corpus would be reduced by the amount of the exit load.

Another caveat is that ultra short term funds carry some credit risks, but given how Sebi regulates the industry, the chance for you to not meet your target is low. On the other hand, the chance of you getting more than what you are aiming from a competing product is high in case you are invested in a fund scheme. On top of all these, you also tend to enjoy better tax advantages when you invest through the fund route.

The two accompanying articles, one by Surya Bhatia and the other by Jiju Vidyadharan, give two varied perspectives to the same idea — that of using debt schemes to meet your short- and medium-term financial needs.

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