Why FDs ( Falling Down Interest), when you have Medium Term Bond Funds

Posted By: Admin

We are all well aware that the Bank deposit rates have been heading deep south over the past few months. Most Banks are offering 5- 5.50 % Interest on Fixed Deposits for a period from 1 to 3 years. For a tax payer at the highest slab, this works out to a post tax rate 3.50% per annul(considering 30% tax rate).These are difficult times and unprecedented due to the Covid pandemic, so Bank FD seems to be the safest recourse. The truth is also that the very low interest rate esp post tax hardly even covers inflation.

Is there another option ?

While we believe that bank FD is an important component in one’s portfolio ( purely from a safety standpoint) one may also look at the Medium Term Bond Funds as an alternative. As the name suggests, these Medium Term Bond funds invest in a combination of highly rated Corporate bonds, Govt Securities with an idea of delivering superior returns to the investor. Since these are medium duration i.e 2-5 years , they also represent lower risk in the form of interest rate fluctuations . One of the benefits of these bond funds is that they diversify investments among many instruments corporates , Govt securities etc. The holding in one security rarely crosses over 5 %. This model therefore delivers a great value from its diversified nature.

An indicative list of funds is enclosed herewith. Notwithstanding a black swan event like the winding down of Franklin Templeton Debt Funds, we still believe that the medium term Bond fund as a category offers tremendous Risk Reward trade off. With a long term capital gains classification, indexation benefit and lower tax rate if held for a 3 year period along with a superior return to the holder, the advantages of this instrument is quite apparent. Make no mistake the storm is coming, once the moratorium comes to an end in August. We will know the financial health of many institutions in the months to come. So expect to be faced with some volatility. However if you do have an investment horizon of 3 years and beyond, this may offer a viable alternate to the Fixed deposit.

Safe Harbor : Investment in Mutual Funds are subject to market risks, please read

the scheme details carefully before investing.

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