For a time horizon of around five years, you can consider investing in a medium term debt fund. A well-rated income fund with a good track record can be chosen.
Debt funds (long-term) offer higher tax efficiency and liquidity as compared to fixed deposits. The interest earned from a bank FD is added to one’s income for tax purposes, which is taxed as per the applicable slab of the investor. On the other hand, returns earned from a debt fund held for the long term i.e. greater than one year are treated as long term capital gains (LTCG). One can avail the indexation benefit in case of LTCG of debt funds which reduces the tax liability. LTCG is then taxed at 11.33 per cent without indexation or 22.66 per cent with indexation.
However, debt funds are not risk-free like bank fixed deposits. They invest in bonds and hence, carry credit risk and liquidity risk related to the specific instruments held by them. They are also affected by interest rate risk. Hence, the choice of whether to invest in a bank fixed deposit or a debt fund would depend on one’s risk appetite.
SIP is a suitable method of investing in equity funds because equity, as an asset class, is more volatile. For debt, one-time investment is recommended. As for saving entry load, direct investments without an intermediary are not charged entry load. But at the same time, normally, debt funds do not charge an entry load.
Debt funds (long-term) offer higher tax efficiency and liquidity as compared to fixed deposits. The interest earned from a bank FD is added to one’s income for tax purposes, which is taxed as per the applicable slab of the investor. On the other hand, returns earned from a debt fund held for the long term i.e. greater than one year are treated as long term capital gains (LTCG). One can avail the indexation benefit in case of LTCG of debt funds which reduces the tax liability. LTCG is then taxed at 11.33 per cent without indexation or 22.66 per cent with indexation.
However, debt funds are not risk-free like bank fixed deposits. They invest in bonds and hence, carry credit risk and liquidity risk related to the specific instruments held by them. They are also affected by interest rate risk. Hence, the choice of whether to invest in a bank fixed deposit or a debt fund would depend on one’s risk appetite.
SIP is a suitable method of investing in equity funds because equity, as an asset class, is more volatile. For debt, one-time investment is recommended. As for saving entry load, direct investments without an intermediary are not charged entry load. But at the same time, normally, debt funds do not charge an entry load.
