The Debt Mutual Funds have been superior in the Debt Asset Class due to their taxation advantage, thanks to indexation. Almost all its counterparts in the asset class whose yield mostly comes from interest payment have been taxed at the marginal rates. The Debt Funds lose the crown of taxation advantage from 1st April but how much attraction does it lose as an investment option?
Debt Funds invest in a basket of debt securities of various institutions, private and government spread across industries. This gives great benefit of diversification versus investing in a single fixed income security like a single NCD issue or a single Corporate Deposit . This diversification gives great comfort in the credit risk perspective or even the interest rate risk aspect due to the sectoral and company diversification and variation in maturity of their holdings. So, for a debt investor the debt funds still have great value to offer though the taxation is on par with other product peers. More importantly with the yields of debt funds remaining attractive now, this is one great time to invest in long term debt funds which can potentially deliver 8 to 10% annualised returns over a 3 to 5 year period which can eventually offer a better net yield. Even for fresh investments from 1st April these Mutual Fund schemes would not deduct TDS whereas in a Fixed Deposit TDS will be deducted on the interest accrued every year even if it is not realised. So, debt funds have not become unattractive in any way as an investment option, though the taxation is changing.
Gold funds, which also get impacted by this announcement would relatively become less attractive by losing the indexation benefit. Unlike the debt funds they have only gold as the underlying and so diversification aspect is irrelevant unlike debt funds mentioned above . However they offer the benefit of holding in electronic form avoiding the risk of holding in physical form. Also gold funds are the only way to invest in gold in a systematic way through Systematic Investment Plan(SIP), to invest a fixed amount monthly or any other periodicity, which is not possible to do in a gold ETF or gold SGB(Sovereign Gold Bond) or other forms of gold. Investing monthly in the gold savings schemes of Jewellers has single organisation risk and no regulations governs those investment. So though gold funds have come on par with other form of gold investments on taxation front barring SGBs, the above mentioned benefits remain with Gold funds. That said, going forward SGBs can pull in more investors as the capital gains from them are tax free if held till maturity of 8 years and with the icing on the cake of 2.5% interest paid every year.
These funds are the exotic investment options available to a retail investor as a minimum of Rs.5000 investment can give exposure to a basket of foreign stocks across countries to take advantage of growth potential of international equities. These funds also have been enjoying the benefit of indexation after 3 years. Equity Funds are investments done for a longer time frame with expectation of returns upwards of 12%. An investment with potential of delivering 12% plus returns even after taxation at marginal rates has a decent net return left on the table with little alternatives. A retail investor though has the option of investing directly in foreign equities he would hardly be able to afford buying a large basket of stocks to match the diversification advantage offered by international mutual fund schemes. Investing directly in foreign stocks also attracts high TCS(Tax Collected at Source) of 20% now which need not be paid while investing in International funds. So International Funds would still be left without any comparable substitute as an investment option for a retail investor looking for investing in foreign stocks.
So, an investor should not be in a hurry to show his back to these categories of funds just because of the taxation advantage going away and there is lot more reasons these funds offer for someone to invest.