Have debt in your portfolio? Consider these tax-efficient alternates.
Subscribe to enjoy similar stories. The investment world rarely stands still. For instance, because of the taxation reforms, the once-reliable compass of debt mutual funds now points to uncertain territory, leaving high-net-worth individuals (HNIs) scrambling to rethink their investment strategies.
The question now isn’t whether to adapt but how to do so effectively. This requires a thoughtful reassessment of investment strategies. But first, let’s dive into the problem at hand.
The combined effect of announcements in the budgets for 2023-24 and 2024-25 have significantly reduced the allure of debt mutual funds for investors. The removal of , long considered a key advantage for debt fund investors, has notably impacted the tax efficiency of these instruments. Under the new regime, gains from debt mutual funds will be taxed at the investor's income tax slab rate regardless of the holding period.
For HNIs, this change hits where it hurts most. Those in the highest tax bracket will see their effective tax rate on debt fund gains jump to 30%. With surcharge and cess, it can be as high as 39%.
The result: What was once a comfortable 7% post-tax return expectation has now dwindled to a sobering 4-5% for many investors. But as one door closes another opens, and lower net equity instruments have begun to attract attention as potential alternatives. These financial products—think arbitrage funds and equity savings funds—offer a unique proposition that merits consideration from the HNI community.
Arbitrage funds, for example, present an interesting case. Despite having zero net equity exposure, these funds have been delivering average returns of around 7.6%. While the returns are in line with those of liquid funds, the appeal of
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