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Invest In Short Term Debt Funds

IndianMoney.com Research Team | Updated On Monday, August 27,2018, 06:16 PM

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Invest In Short Term Debt Funds

 

 

 

If you want to construct or purchase a house, availing a home loan is inevitable. Home loan not only helps in getting that dream home, it also gives tax benefits. Banks usually grant home loans ranging from 75- 90% of the total value of the property. You have to pay the remaining amount as down payment. (Out of pocket expenses).

You must save to collect money for the down payment. However, savings must be invested wisely to accumulate the down payment. Keep an eye on your savings bank account, fixed deposits, gold, mutual funds and so on. Maintain an emergency fund with six months of living expenses. Set aside money for short-term goals. Consider investing the rest on down payment.

If you wish to accumulate money for down payment in less than three years, invest in short-term debt funds. Many citizens invest in Fixed Deposits. However, it is important to diversify your investments. Consider short-term debt funds and recurring deposits. Avoid investing in equity funds and stocks as they are a long-term investment.

Want to know more on Debt Funds? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

See Also: Taxation of Debt Funds

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Invest In Short Term Debt Funds For 2-3 Years To Accumulate Down-payment For House

Rohan is 27 years and works for an IT firm. He is married and plans to buy a house in 3 years. He plans to save Rs 20 Lakhs for the down payment. He has liquid assets worth Rs 5 Lakhs. He has to arrange the remaining Rs 15 Lakhs. This is what he must do:

1. FDs offer interest at 6.5-7% a year. If you invest Rs 5 Lakhs in FDs at 7% for 3 years, you will get around Rs 6.15 Lakhs at maturity.

2. You can invest Rs 12,500 a month for 3 years in an RD. You get around Rs 5 Lakhs in 3 years. (Let’s assume r =0.065)

 t =4 (frequency of compounding).

A= Monthly Deposit (1+r/t)nt

table1

 

3. The remaining Rs 10 Lakhs can be accumulated by investing in short-term debt funds on a monthly basis for 3 years. Short-term debt funds yield 7-8% a year. Considering returns at 7.5% p.a., investing Rs 20,000 monthly for 3 years will yield Rs 10.3 Lakhs.

t =12 (frequency of compounding).

A= Monthly Deposit (1+r/t)nt

table2

 

 

What are short-term debt funds?

Short-term debt funds are a type of mutual funds, meant to be invested for 1-3 years. Short-term debt funds carry reasonable risk and aim at give relatively stable returns. These are alternatives to fixed deposits (FDs) of the same tenure. Though riskier than FDs, if held for at least three years, short-term debt funds prove to be more tax-efficient.

According to new rules, short-term debt funds are not allowed to take high risks. These are only invested in highly rated bonds of tenure 1-3 years.

Remember, if short-term debt funds are invested for more than three years, they become long-term debt funds. Long-term funds enjoy indexation benefits.

 

SEE ALSO: Personal Loan vs Business Loan: Which Is Better?

 

Short-term debt funds advantages:

1. Debt-funds are more tax efficient compared to fixed deposits.

A tax of 20% is charged on long-term capital gains (LTCG) on debt funds, with indexation. Indexation considers the effects of inflation on debt funds vis-a-vis year of purchase of the debt fund units and the year of sale. The longer you hold a debt fund, the higher the indexation benefit.

2. TDS is not deducted for debt funds. Fixed deposits interest income exceeding Rs 10,000 a year attracts TDS.

3. Gains earned from debt funds can be set off against short-term and long-term capital losses.

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