In the present day, a number of private and non-private sector banks are providing 5.25 – 5.75% p.a. on their 3-5 yr FDs, exhibits BankBazaar knowledge. In comparison with this, many related maturity TMFs are providing returns of 5.6 – 6.2% to those that stay invested till fund maturity (knowledge as of Feb-end 2022).
Holding interval issues
TMFs provide an enormous tax benefit over FDs to these with an funding horizon of a minimum of three years. Your return from a TMF—the capital achieve, if any, while you redeem your funding after holding for 3 years or longer—will get taxed at 20% plus 4 % cess after indexation profit. Below indexation, your capital achieve is calculated because the distinction between the sale worth of the TMF items and their listed price of buy (that’s, adjusted upwards for inflation utilizing the federal government’s Value Inflation Index). This brings down your capital achieve for taxation functions. Alternatively, curiosity revenue from an FD is taxed at your revenue tax slab price plus a 4% cess.
Nevertheless, short-term capital achieve (holding interval of lower than three years) from a TMF will get taxed the identical method as FD curiosity revenue. So, for such quick intervals, TMFs might not provide a post-tax returns benefit over FDs.
High quality counts
In the present day, all TMFs are investing in g-secs (GoI bonds), SDLs (state growth loans or authorities bonds), AAA-rated bonds, or a mixture of these. This makes TMFs, particularly these centered on g-secs and SDLs, low danger, given the central authorities assure for these devices, explicitly or in any other case.
Joydeep Sen, a company coach, and writer, says that an FD with main private and non-private sector banks too could be thought-about low danger. An FD with a financial institution with weaker financials, nonetheless, might not be equally secure, besides to the extent of the deposit insurance coverage cowl of as much as ₹5 lakh per financial institution.
Ease of untimely exit
Untimely exit from a financial institution FD attracts a penal price of curiosity. Exit from a TMF comes with no restrictions and you’ll redeem your funding any time earlier than maturity.
A untimely exit from a TMF can, nonetheless, expose you to rate of interest danger —in a rising price surroundings, bond costs are likely to fall, which leads to a fall within the NAV of a debt fund equivalent to a TMF. As Sen factors out, it’s a selection between the finite penalty of financial institution FDs versus the unknown rate of interest danger of TMFs.
Supply: Live Mint