Debt Funds

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: to Rs 100, which is the overall income for both the fixed deposit and liquid fund. Now, the net tax benefit is Rs 33.99 - Rs 22.07, which works out to Rs 11.92. This is only in the case of liquid funds.

The tax on other debt schemes is 14.16%, which is even lesser and it widens the arbitrage opportunity for the investors.

HNIs and corporates, who want a tax benefit plus liquidity, can use the arbitrage opportunity. And for these, rather than keeping the surplus in a savings account (at 3.5%) or current account (no interest) or fixed deposits which have a lock-in period, liquid/money market funds are better options. As investor incomes fall under the 30% tax slab, saving a tax on that amount is significant in value.

Also, investors who want to invest for the medium- or long-term can go in for FMPs as dividend distribution tax (DDT) is less than the income tax in case of fixed deposits. If an investor chooses the growth option, then the tax implication is very different. There are two types of tax structures: long-term capital gains tax (LTCG) and short-term capital gains tax (STCG). The time period for STCG is less than one year and the returns are taxed at 33.99%.

In LTCG, the period considered is more than one year. The tax can be calculated in two ways. A tax rate of 10% flat is imposed on the income earned. The other is 20% tax on the basis of indexation. Indexation is the process by which inflation is taken into account when computing the tax liability. The tax rate of 20% is calculated on the differential amount between the income and indexation amount.

While these are the caveats and the technicalities involved in debt schemes, it is also equally important to note how these funds have performed. The reason being on the basis of their performances, the significance of these observations will come to the surface and also be verified.

Best performer

The returns on the funds depend on the maturity profile. And hence, in order to differentiate the best performers in debt schemes, we have divided their performances according to their maturity profiles. For instance, non-convertible debentures give higher interest than commercial paper as the former is for the medium- and long-term and the latter is for short and medium term instruments.