Debt funds better bank FDs in post-tax returns

Investment in income funds with investment horizon of one-year and above would have fetched you best post-tax return followed by short-term debt fund and then bank fixed deposits (FDs).
While average returns declared by debt funds were better than bank FDs, it is important to park your money in the right fund.
One-year and above income funds gave an average pre-tax return of 9.34 per cent. While highest return of 14.67 per cent was reported by Canara Robeco InDiGo fund (G), lowest was 4.75 per cent by Sundaram Income Plus (G).
These calculations are on returns based on the net asset value (NAV) as on May 22.
On the other hand, short-term debt mutual funds gave average pre-tax return of 9.21 per cent. While highest return of 11.74 per cent was reported by Religare Short Term Plan (A) fund, lowest was 7.16 per cent by Mirae Asset Short Term Fund (G).
Short-tem debt funds have a maturity period of six months to one year. Benchmark index for calculation is Crisil short-term bond fund index. One-year return of 36 funds was analysed.
Some debt funds have been excluded in this calculation, as their benchmark index was Crisil liquid fund.
If you had invested one year ago, banks like State Bank of India (SBI) and ICICI Bank were offering interest between 8.25 per cent on one-year FDs. Other banks were offering around 8.5-9 per cent. Some of the smaller private banks like South India Bank, Karnataka Bank Bank and IndusInd Bank were offering interest between 9- 9.25 per cent.
Assuming that you belong in the highest tax bracket of 30 per cent, if you would have parked your money in one-year FDs with SBI and ICICI Bank, your post-tax return would be 5.78 per cent.
Even with peak interest rate of 9.25 per cent on one-year FDs, post tax return would be 6.48 per cent, whereas, in income funds and short-term debt funds with investment above one year, long-term capital gains tax of 10 per cent without indexation is charged. This would have resulted in post-tax return of 8.41 per cent and 8.29 per cent for income and short-term debt funds, respectively.
Divya Baweja, senior director, Deloitte India said, “Calculation of post tax return in debt mutual fund is complicated and based on a fixed formula. On bank FDs returns, one has pay tax depending on his tax bracket.”
“There is no tax paid by individual investors if he has opted for a short-term debt fund or liquid fund with dividend option. Dividend distribution tax (DDT) is paid by mutual fund companies. However, in case of growth option, where no dividends are declared and the NAV rises by the accumulated earnings of the debt fund, investor will bear only a long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation,” said Kartik Jhaveri, certified financial planner.
Income and debt funds invests in bonds, debentures, government securities and short-term instruments like commercial papers and reports.