Oh! Did we just killed the Debt Mutual Funds?
Oh! Did we just killed the Debt Mutual Funds?
Did we ? Lets Understand it in simpler way!
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Picture this: You're a rookie investor, excited to put your 10 lakh Rupees💰💰💰💰 to work and make some returns. You turn to a financial expert for advice, and they immediately suggest investing in a Fixed Deposit (FD) that offers a seemingly attractive 6.4% return.
But hold on a minute, what about taxes?
As it turns out, you fall into the 30% tax bracket, which means you'll end up paying a whopping 30% tax on that FD return, leaving you with just 4.3% earnings.
Ouch, that's not so great after all!
But fear not, the expert suggests investing in a debt mutual fund instead. Kyun?
Bcz …Debt Mutual bhi Fund Sahi hai
While it may earn you a higher return than an FD, the real advantage lies in taxes.
If you sell your investment after three years, you'll only need to pay a 20% tax, and that's not all - you won't even have to pay tax on the 7% return!
Thanks to the 'indexation benefit,' you can make an adjustment for inflation and only pay tax on a tiny portion of the excess returns.
you'll see that your actual return after tax is a solid 6.2%. Not bad, huh? And the cherry on top?
Debt mutual funds aren't as risky as you might think - not all of them invest in the stock market, and some simply loan your money to other companies or even the government.
So, what are you waiting for? Sign up for debt mutual funds and watch your earnings grow! Haha 😄
To understand this future dream in much simpler terms please look below:
The Result 😲
but you will ask … Why in dreams? 🛌
Because the funds are set to lose this taxation benefit (indexation) from 1 April, as per one of the amendments in the Finance Bill, which was passed in Lok Sabha on 24 March.
Without indexation, we might consider moving to FDs. And after paying our taxes, our investments may not beat inflation anymore. We’ll lose money.
According to CLSA, roughly ₹8 lakh crores is invested in these debt mutual funds. And 11–14% of the revenues that mutual fund companies make come from the fee they charge on these products. If they don’t see this pie growing from here on, their revenues won’t grow at the same pace either.
For existing investors or those who invest in a debt MF before 1 April, there is still a silver lining. Any investment done before this date will still enjoy the LTCG tax rate of 20% with indexation benefit after three years.
Industry experts say this would not only impact investor flows into debt funds but also the bond market.
“MFs offered liquidity in the domestic bond market, which is otherwise not as liquid. Investor flows coming into debt MFs were deployed into the bond markets,” points out Niranjan Avasthi, head, product, marketing and digital business, Edelweiss Asset Management.
“This move not only impacts debt MFs, but also international funds and gold funds,” says Kirtan Shah, founder annd chief executive of Credence Wealth. The latter fund categories were also treated as debt funds for taxation purpose.
Vikram Dalal, managing director at Synergee Capital Services, says that earlier a target maturity fund, depend- ing on the underlying portfolio, could offer post-tax yield of 7%. “There was a good tax arbitrage in such funds as FD with interest rate of 8% could only offer post-tax return of 5% for those in the highest tax slabs,” he says.
According to people aware of the developments, the Association of Mutual Funds in India is looking to make presentations to government and Sebi to review this move, but it remains to be seen if any changes would be possible.
but till then if you are the one looking for safest option around good luck finding one!👌
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