Debt Mutual Funds Without Indexation Benefits: A Risky Bet?
The division of equity and debt in one’s portfolio has been an age-old conundrum for investors. While risk appetite has conventionally been the guiding principle while making the exact allocation of the investment, a high-cost inflation index (presently 331) and the resulting perks of indexation may have convinced some investors to prefer debt mutual funds as a better home for their money.
Debt mutual funds and short-term alternative investments are popular choices for investors looking for moderate returns without taking on significant risk. However, the removal of indexation benefits from debt funds has introduced a new consideration. It is essential to discern the differences between these investment options and determine whether continuing to invest in debt mutual funds remains prudent.
Understanding Debt Mutual Funds
Debt mutual funds invest in fixed-income securities and are managed by specialists who work on maximizing returns by investing in securities with low default risk. These generally offer higher returns than any traditional savings accounts or fixed deposits but carry a moderate level of risk, making them suitable for investors with low-risk appetites who want regular income streams. However, debt mutual funds are considered a better alternative to fixed deposits, given that they carry more potential to deliver higher returns and also have the flexibility of withdrawal without penalties.
What Are Short-term Alternative Investments?
Short-term alternative investments, on the other hand, refer to a range of investment options that offer low-risk and quick returns, for example, peer-to-peer lending, invoice discounting, and crowdfunding. These investments are generally made for a short duration, typically from a few weeks to a few months. The best part about short-term alternative investments is that changes in the interest rate or market volatility do not impact them. Furthermore, they are not subject to the same regulatory provisions as mutual funds, ultimately giving more flexibility to investors who choose them. Alternative investments platforms, such as KredX, offer invoice discounting that provides investors with opportunities to earn faster returns with short-term deals from blue-chip companies. Besides that, they also help in strengthening investment portfolios with their new range of Assured deals that offer guaranteed returns.
Removal Of Indexation Benefits: The Way Forward For Investors
Recently the government removed the Indexation benefits on the long-term capital gains (LTCG) on debt mutual funds and announced that debt mutual funds would be taxed as per the income tax slabs of an individual’s income under the Finance Bill 2023. With this change from April 2023, investors may need to reassess their investment strategies. To touch base, Indexation benefits helped investors adjust their purchase price for inflation, thereby reducing their tax liability. Removing this benefit will impact the returns generated by debt funds, making them less appealing to some investors.
Looking at a way forward for investors, both debt mutual funds and short-term alternative investments have perks and drawbacks. Where debt mutual funds offer higher returns and are managed by experts, they come with moderate risk. Similarly, short-term alternative investments offer lower risk and higher flexibility but do not generate returns as high as debt mutual funds. It is important to note that debt mutual funds will continue to provide various benefits, including professional management and potentially higher returns than traditional savings accounts or fixed deposits. Investors will have to carefully evaluate their investment goals, risk tolerance, and tax liability before deciding to invest in debt mutual funds and exploring other investment options.
Now Is The Right Time To Explore Invoice Discounting
Invoice discounting and debt mutual funds are two very different investment offerings, with their suitability depending on factors such as an individual’s investment goals, risk tolerance, and tax implications. However, with the indexation benefits gone, invoice discounting can be a better choice than debt mutual funds for many investors. The significant advantage is that investors can get high potential returns compared to debt mutual funds, which are not subject to income tax. Besides, invoice discounting platforms, such as KredX, offer a steady and regular cash flow, making it the primary reason why investors might prefer invoice discounting for their next stint.