How can I shift a part of my money in savings bank account into debt mutual fund and for what period should I look at?
In case you are a first-time mutual fund investor, you would need to have the Know Your Customer (KYC) process completed. You can approach an asset management company (AMC) or a registrar like CAMS or Karvy or other Sebi-registered intermediaries to complete the process. AMCs have various options by which funds can be switched from your bank account to the designated mutual fund scheme including systematic investments (at various frequencies like weekly, monthly, quarterly) or one-time investment.
Debt funds can be broadly categorised into three categories — liquid & ultra-short term funds; secondly, short-term funds & credit opportunity funds; and third, long-term gilt, income and dynamic bond funds. Liquid & ultra short-term funds would typically generate returns marginally higher or in line with short-term interest rates like those available on fixed deposits (FDs) and are suited for an investment horizon of up to 12 months. Short-term funds & credit opportunity funds invest in debt instruments with maturities in the range of one to four years with varied credit quality, generating returns primarily from accruals or coupons that have the potential to be higher than FDs. These are suited for a horizon of 12 to 36 months.
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Long-term gilt & income funds typically invest in medium to long dated debt instruments with the objective of generating capital appreciation from a fall in interest rates, along with accrual income. These are suited for an environment of falling interest rates and have the potential to generate superior returns vs FDs in such an environment. They are suited for a horizon of two to three years.
From a taxation perspective, short-term capital gains from debt funds (on units held for 36 months or less) are taxed based on the investor’s income tax bracket, whereas dividends are taxed at 28.84%. Long-term capital gains (on units held for more than 36 months) from debt funds are taxed at 10% flat or 20% with indexation benefit (which would further reduce the effective tax rate).
The writer, Amit Bopna is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries at firstname.lastname@example.org