When you are investing in a debt mutual fund, you are basically lending to the Government or other corporates through bonds. You can read more about how debt mutual funds work, here. Now, herein lie the issues of whom to lend to, when I can get my money back, what if they default, etc. You can argue that your short-term goals are well accomplished with the traditional investments that give you a fixed return, then why must you invest in debt funds?
Debt funds may provide you with liquidity, transparency, diversification, professional expertise, tax-saving and opportunities to garner returns. Out of all the debt funds types, you will find a type of fund suitable for any goal that you may have. For example, if your goal is to buy a new AC/ refrigerator 6 months- 1 year away, you can invest in ultra short duration debt funds. Debt funds generally come with no lock-in periods; hence your money is accessible at all times. The fund manager uses his/her expertise to either minimize the risks or take on calculated risks such that your investments can strive to achieve better results. . In addition, you have access to the fund portfolio at all times as the fund house ensures such information is made available to you regularly; this is unlike the traditional investments that may lack transparency.
While the short term capital gains on other than equity oriented mutual funds are taxable as per your income tax slab rates, however, if you have invested in it for more than 36 months, your long term capital gains will be taxable @ 20% with the indexation benefit (for resident investors). These tax rates are excluding applicable surcharge
Your choice of a short term debt fund will depend on your goal, investment horizon and risk appetite. The choice can be subjective, but your aim should be to at least match inflation in the short-term if not beat it, which may be possible with debt mutual funds. Here are the types of mutual funds available to you, take a pick today.
