Tax-free bonds vs Debt Mutual funds

Equity Right

Investors in India prefer to invest in safe haven instruments like government bonds, corporate deposits, bank deposits and tax-free bonds. Tax free bonds are one such financial instrument that are in flavor for a long time now. The secondary market is quite active especially after the stoppage of fresh issuance by the government. Currently, these bonds are trading at 5.75-5.78% a level, which for a highest tax slab individual comes to 8.92-8.97%. On the surface, it looks lucrative in comparison to various taxable bonds and FDs as these are government backed.

But for how long will it be a safe bet?

In the current scenario Debt mutual funds is a better option as compared to tax free bonds. Advantage of debt mutual funds is tax efficiency. Also, there is diversification of funds in terms of interest rate and credit risk.

Furthermore, all the mutual funds are actively managed by professional fund managers, who know the composition of the portfolio to suit market outlook. It will also give best returns in long term. Exit from debt mutual funds is also easy.

Currently, there are some best funds where one can invest in medium term tenure funds, which would be less volatile in nature and are expected to provide better yields. One should opt for growth option and stay invested for at least 3 years. In addition to this, post 3 years, debt mutual funds are subject to long term capital gain with indexation benefit.

ICICI Prudential Long Term Plan-Growth

This fund comes under dynamic category which invests across the yield curve to maximize returns. Currently the allocation of fund is at 74% of its AUM to G-Secs. In addition to this it has allocation of 92% in AAA rated securities, 8% to AA rated securities.

Franklin India Short term Income Plan-Growth

It is a short-term income fund which follows of invests in debt instruments to earn higher yields by investing good quality bonds. Currently, it has allocated 24% to AAA rated securities, 32% to AA rated securities and 44% to A rated securities to generate stable returns.

HDFC Regular Savings Fund-Growth

HDFC Regular Savings Fund is a short-term income fund. It aims to generate long term income through higher accruals. Currently it has allocated 30% to AAA rated securities, 54% to AA rated securities. Further it invests 16% in A rated securities to generate stable returns.


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