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Use Debt Funds to Help Achieve Goals

 

Use Debt Funds to Help Achieve Goals

 

Some debt fund investors and their financial advisors have been devising ingenious methods to beat the higher capital gains tax proposed in the Budget. Arbitrage funds, rolling over investments in fixed maturity plans, balanced funds... every week, a new avenue to tackle the new tax regime was floated and debated. The FM hiked the long term capital gains on non-equity funds to 20% from 10%.

He also increased the holding period of investments to three years from one year. However, many advisors feel that investors must now focus on planning their debt investments just like they plan their equity investments.

I think it is time we stop trying to devise ways to overcome the higher taxes, and start focusing on planning debt investments. The trouble is that most individuals don't plan their debt investments. Parking surplus funds in liquid funds or FMPs was a debt mutual fund investment for many individuals, or chasing the interest rates to earn better returns. That has to change now, especially because of the three year restriction.

Many experts say these debt investors and their advisors are still focusing only on change in taxation as investing in debt mutual fund schemes was all about better post-tax returns for them.

The sales pitch was always debt fund have tax advantage over bank fixed deposits. Most advisors won't even speak about the possibility of better returns, especially when the interest rate cycle changes.

He says this sales pitch of superior to bank deposits is the sole reason behind the hike in long term capital gains tax on all non-equity schemes.

In short, if you have invested in debt mutual funds only to earn better post-tax returns on your surplus cash in liquid fund or FMPs, rethink your strategy . Similarly, if you parked money in debt schemes only due to the interest rate movements, you may have to redraw your strategy .

Your investment strategy should be based on your future goals and investment horizon. It can't be solely based on taxation. If anyone was using such a casual approach to debt investment, it was absolutely wrong.

Experts opine that the easiest way for individuals to ensure that they pick up the right investment is to focus on their goals, time in hand, their risk taking ability, and, of course, taxation on returns.

We have always used asset allocation to decide on the investment. It was always about liquidity needs, goals, time in hand and risk profile of the investor and so on. In fact, many people who had a financial plan were always using this method to invest their corpus.

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