RBI set to cut rates soon: Which debt mutual fund should you invest in now?
SBI, ICICI Bank and Axis Bank, have hiked their deposit rates. You can earn 7.25% interest on deposits of 1-2 years. Smaller banks, such as the Bandhan Bank, are offering 8%, while NBFCs, such as Sriram Finance, are giving up to 8.9% per annum. Senior citizens can expect 0.5-0.75% higher rates.
Sitting in their house in Bengaluru, senior citizens Ranjitha and B. Srikumar are not enthused by the high rates offered on bank deposits. Their pensions put them in the 30% tax bracket, which means the post-tax yield of a 7.75% fixed deposit is barely 5.3%. “We are looking to invest in a debt fund that can give better returns than fixed deposits,” says the retired Air Force officer.
Debt funds have lost some of the sheen following changes in tax rules in 2023, but they still score over bonds and fixed deposits. For one, when a fixed deposit matures, the investor has to reinvest the proceeds at the prevailing interest rate. If the rate has fallen, he will have no choice but to go with the lower rate. There is no such reinvestment risk in a debt fund. Though the gains from debt funds are now taxed at the same rate as the interest on deposits, they can be offset against losses from other investments. There are other advantages as well.
Bond yields have receded in the past year
Yields of very long-term bonds of 30 years are still above 7%.
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