After the removal of LTCG indexation benefit of debt funds, I wanted to ask whether debt funds are still better than bank fixed deposits?
Some points which I think are still good for Debt Funds are:
Your money is divided into 100s of companies/banks/institutions so better safety than the bank, with FD entire risk on one bank (although 5L is insured)
The returns can still be a bit more than FD in the longer term in case of active play by the mutual fund manager (just like equity)
You can redeem whenever you want without penalty, and also in fractions, FD has 1-2% penalty for premature withdrawal
Tax is to be paid only on redemption. Whereas with FD, tax is to be paid yearly even when FD maturity is far away. So we’re losing on interest on paid tax money
100 of companies only make it diversified within Corporates. It cannot be compared with that of a Bank. Even the smallest of bank will be better than the 100s of Corporates who seek money. This is not the right comparison at all. No company worth its salt can be compared to a Bank as an entity. (I am talking about PSU and too big to fail banks and not coop banks and small finance and unlisted banks). A bank can always go to RBI and borrow money for short term purposes. Which Corporate gets such facility? It is for this reason, they are called “lender of the last resort” “Bankers Bank” etc
That is the minimum, but no depositors have lost money till now. However, in a debt fund, you can expect side pocketing as companies can go bankrupt. There are so many examples.
Yes it could be, but do note that you are paying charges on a every year basis based on the AUM. Whether the fund is generating more or less, the AMC makes money. Good ole FD does not have any such issues. Secure, liquid and here to serve.
When you redeem you are at the mercy of the NAV on that day. FD has a penal rate if you close the FD before the maturity. However, do note that the bank will be giving you the interest for the duration for which the FD has run. And the penality is on the interest paid and not on capital. As in any business, when you contract for a specific period, you need to honor the period, if not, you should be willing to pay a small, a very minor, miniscule penalty. This is just fair is it not. If you anticipate need of funds, book an OD against FD so that you can use the funds when in need and settle this off. I am sure you do not get this option in a debt fund. Can you guarantee that when a debt fund is redeemed, you will always get your capital plus interest on the closure date. I do not think so.
On an average a family in India will be 3 plus 2 (parents). Your tax exemption limit is 5 or 7 lacks, you can sign 15g or h form and bank will not charge the TDS. On a simple calculation and you can easily put 70 lacks x 3 = 2.1c at 7% interest and if you include your parents another 1.4 c. Yes, your salary and other income comes into play, so for the middle class, tax is not an issue
Yes you will if you have a very high corpus. Any one who has very high corpus will first lay his foundation in FD, fill this up to the max, as everyone knows that capital protection is essential in this world, and any incremental amount will be placed in debt fund and other stuff. Asset allocation is critical. When you do asset allocation, it is always better to have proper diversification, keep money at a place where there is no impact if the market crashes. Do I really bother what SBI does with my money. No. I dont. But I will bothered when I read that corporates are not doing well, who knows, one of the corporate could have borrowered from the debt fund.
You have recent examples of how Fed Reserve came to the rescue of depositors. Same case with credit suizze. Central Bankers will pitch in and protect the interest of the bank depositors. In India it was Yes bank where RBI asked competitor banks to come together and support Yes Bank. All Did. Which debt fund will get such assistance. Mukesh Ambani one of the richest man in Asia did not come to the support of his own brother Anil Ambani company. He just watched his brother company disappear. However, SBI, IDFC, kotak, federal bank, bandhan bank, HDFC, Axix, Icici came to the rescue. Think these were are all their competitors but when RBI tells them to support, they will.
Any bank apart from their own internal auditors and external auditors need to have their books scrutinised by central bank auditors. There are periodic reports being sent to them on a daily, monthly and quarterly basis. No other corporate in this world will be scrutinised to such level. Listed banks will have thousands of analyst covering the same. Hence it is just unfair to compare a bank and say they are insured only upto 5 lacks when the central bank i.e Soverign keeps a close eye on them. With all this control, there are frauds like in Yes Bank, think without all this how will a corporate fare.
My only quarell is when a corporate is compared with a bank when it comes to security of the product.
Disclaimer - I am a strong proponent of FD and Banks, most of the regular users in this forum are familiar with my bias and all will be saying “Oh no not again - why cant the person stop being a “nag” - its utterly butterly nonsense, irritating, and time waste” but I could not stay quite when @Jason_Castelino passes it on to me.
Don’t underestimate yourself, Its ok to have a conviction on one’s belief . Any ways in personal finance nothing is constant as regulation changes overnight . What seems a bad instument turns out gold or what seems gold turns out crap overnight( Ask At1 bond holders of Credit suisse 160 years old institution had to be saved in a weeks time)
My view on FD is right now its very good time to book 10 -20 years FD as INDIA in CAPEX cycle so govt will take lots of loans so interest rates should be low ,even RBI governor said this should be the last hike and rest of the year they would think on reducing rates.
PS: No body puts all eggs in one basket , with Long term FD there is duration risk involved and no body can guess the interest rate cycles. Also , for Trading we require working capital for which only place to park in debt funds. So , it again very personal thing where to keep the money
Thank you for the detailed answer! I get the point from you that banks FDs are more secure than a debt fund.
The way I am looking at debt funds is from a long term POV (say 8+ years), where the corporate bond debt fund would have individual corporate bond holdings paying out higher coupon rate than the bank FDs, wherein even after rating downgrades and defaults of “some” corporates in the fund, the overall return over a long duration of a corporate bond debt fund with large AUM should be somewhat more than with FDs.
For example, considering a corporate bond debt fund with very large AUM, like the ICICI Prudential Corporate Bond fund, with 70% corporate debt and 27% soverign debt, individual bonds of single corporates have exposure of about 1-2% max, so in case of even a default, the NAV of such a debt fund should fall by 1-2% max. Over a period of 8+ years, the higher returns at the end (earned by higher coupon rates and bond buying/selling) would compensate for such defaults/rating downgrades.
Keeping corporate bond funds aside, how do banking and PSU debt funds, soverign bond funds or for that matter, the new category of target maturity debt funds which contain 100% soverign and state government bonds fare? These should have very less likelyhood of rating downgrades/defaults and the only factor affecting these should be interest rate changes.
This is a good point, in my personal case however, I am yet to be married and both my parents have their income and also in their own tax brackets. My personal income tax bracket is also 30%, so I would have to pay 30% on any interest made.
This is the beauty of having invested in FD. When the rates are high lock in for higher duration. After six months if the rates go up, close the FD and re open the same with higher rate (you need to pay a small penality on the interest earned which is nothing as against the higher rate you are going to get). At the same time, when the rates fall, you are protected until the duration of the FD.
I do not think this advantage you get with a debt fund. The moment market rates rise, the existing debt fund NAV will fall. You cannot close and reopen without losses.
Actually ,it dynamic you get the benefit in debt fund when interest rate falls so it gets compensated.
Just check CAGR return of Gilt, corporate, medium duration for 5- 10 years , you will get around 7-8.5% .Which is around highest rate of FD . So, more or less the same.
