Debt mutual funds without indexation are still a good investment bet for medium to long term

Although there has been a structural change in investment themes, Debt Mutual Funds are predominantly investing in Central Government Securities, Corporate Bonds, Commercial Papers (CPs), Certificates of Deposits (CDs), T-Bills and State Development Loans (SDLs). Are. The role of debt MFs has also become significant in financial intermediation through funding of debt securities of government and corporates.

For risk averse investors looking for returns, debt MFs can be an option. The best part of going for debt MF is that it can be redeemed any time. Investors of debt mutual funds have the flexibility to redeem the investments to meet medical or personal requirements. A hedge against equity market volatility or volatility, returns can be less volatile than equity markets. The low expense ratios of some debt mutual funds also make investing in mutual funds attractive for investors.

Having said that, debt mutual fund indexation is one thing that drives many investors to invest in debt mutual funds. Inflation-adjusted returns reduce tax liability due to indexation. To avail indexation benefit, one has to invest in debt mutual funds for three years or more. The indexation provision allows the price of investments made at least three years ago to be adjusted for inflation. Due to this, the capital gain on sale or redemption is reduced, resulting in lower tax payable.

The idea behind this provision is to adjust the effect of inflation on the investment value. Calculated from the Cost of Inflation Index (CII) data provided annually by the government, the index is applicable only in a scenario where inflation is positive. Gains from investments in debt MFs of more than three years are generally classified as long-term capital gains (LTCG) tax. Indexation makes debt MFs a useful fixed income investment vehicle.

However, as per the amendments in the Finance Bill 2023, which will come into effect from April 1, 2023, the indexation benefit in debt MFs will be removed from April 1, 2023 and debt MFs will be taxed at income tax rates as per the income of an individual. , Therefore, investors desirous of availing indexation benefit have time till March 31, 2023, to avail indexation benefit. Nevertheless, the tax implication should not act as a counterbalance to investor sentiment, as the other benefits of debt MFs outweigh that obvious.

Most of the debt mutual funds come without exit load. Furthermore, AMCs maintain transparency when it comes to updating investors about the deployment of funds. In a falling interest rate scenario, investors are likely to see appreciation through mark to market gains in mutual funds. Debt MFs offer a range of options across liquidity, tenure and credit spectrum, active and passive solutions. The clear differentiation of debt MFs i.e. diversified portfolio, along with very high regulatory oversight, highest disclosure standards makes debt MFs an investment option for retail as well as institutional investors.

With bond yields at 7.30%-7.40% (Source: Bloomberg), I believe this is a good opportunity to invest in medium to long term funds, GILT funds, BPSUs, debt ETFs and liquid funds in the short term Could Money market funds depend on individual risk appetite.

Author: Sanjay Pawar, Fund Manager – Fixed Income, LIC Mutual Fund Asset Management Ltd