Falling interest rates: Invest in debt mutual funds for better returns

You have already heard it: it is time to shift your money in bank deposits to debt mutual fund schemes to benefit from likely fall in interest rates. It is time you actually implement it. Many investment experts believe that it is wise to invest in debt funds at a time when interest rates are poised to fall soon.

“The debt funds are giving you 8-9 per cent returns and your investment will be giving a huge amount of capital appreciation. This scenario is straight away better than a bank FD which is giving less returns and will be taxed as per your marginal rate of taxation,” says Abhiroop Mukherjee, Senior Manager - Fixed Income, Motilal Oswal AMC.

Abhiroop Mukherjee also says the way things are moving on, he is expecting a lower interest rate regime in India. “Till the interest rates are headed southwards, the debt investors will be benefitted.”


For late comers, there are many reasons why money market participants are expecting an easy interest rate scenario in the coming days. Banks have already started reducing deposits rates because they are awash with funds after the demonetisation drive of the central government. The RBI is also expected to ease policy rates because of the ample liquidity in the system.

“The slowing down of the economy will have a disinflationary impact. In such a case, there is an expectation of a rate cut by RBI which will have a direct impact on debt funds,” says Akhil Mittal, Fund Manager, Tata Dynamic Bond Fund.

Even though investors should always pick the funds depending on their investment horizon and risk appetite, Akhil Mittal says the current market scenario is ripe for investing in dynamic bond funds, income funds, and long-term gilt funds.

Investors should also consider the tax advantage enjoyed by debt funds over bank deposits. Investments in debt mutual funds over three years qualify for long term capital gains tax of 20 per cent with indexation benefit. Indexation helps to bring down tax liability on returns.

“Even if you are withdrawing your money from the debt fund before three years and your fund is giving you a 9 per cent return, you will still be taking home 7 per cent after taxation, which is better than the bank FDs post taxation,” says Abhiroop Mukherjee.