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Tata Capital > Blog > How to Choose Fixed-Income Instruments Now When Taxation is at Par?

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How to Choose Fixed-Income Instruments Now When Taxation is at Par?

How to Choose Fixed-Income Instruments Now When Taxation is at Par?

The Finance Bill of 2023 marked a significant change in India’s debt mutual funds (DMFs) taxation policy.

  • It removed the long-standing benefits of indexation and long-term capital gains (LTCG) for investors who held these funds for over three years.
  • The new regulations treat debt funds at par with fixed deposits and tax them according to income tax slab rates that apply to investors, regardless of their holding period.
  • Now that the taxation is at par for fixed-income instruments, here are some factors you must consider while choosing the best investment option.

1. Risk factor

Investments with higher risk can have the potential for higher returns, but each investor has a different tolerance for risk. So before jumping the gun, assess your risk tolerance level. Once you know how much risk you can handle, you can choose from various options that fit your investment and risk profile.

For example, among fixed-income instruments, fixed deposit is considered the safest option as opposed to debt funds because the latter are subjected to market forces and conditions. While, fixed deposits are unsecured, whereas debt funds are secured by the securities they hold.

2. Liquidity

Things can go south quickly. So, you must ensure adequate liquidity in your investment portfolio. In this regard, recurring deposits and debt mutual funds are highly liquid investment options that allow immediate withdrawals.

However, it is important to note that early withdrawal of fixed deposits may attract penalties, and selling mutual fund units may involve fees. Therefore, before making any investment decision, consider the investments’ liquidity and associated costs.

3. Flexibility

When investing in fixed-income instruments, it’s important to consider the flexibility and diversification they offer. Investing in a debt fund allows you to choose from various types of funds based on your investment goals.

For instance, if you want low-risk and steady returns, you can opt for short-term bond funds. However, if you are willing to take more risk for the potential of higher returns, you can consider long-term funds or credit risk funds.

4. Associated costs

When investing your money, do not overlook the costs associated with it because they can directly impact your returns. For example, investing in fixed deposits doesn’t have any direct costs associated with it.

However, if you want to invest in debt funds, you will be charged a recurring expense ratio, which can range from a few basis points to around one percentage point, depending on the type of fund you choose.

5. Return on Investment

ROI, or return on investment, holds great significance when making investment decisions. While fixed deposits offer a stable and assured return, debt mutual funds are subject to fluctuating returns. Individuals seeking consistent returns and a low-risk investment option may choose fixed deposits over debt mutual funds to avoid market fluctuations. While, in case interest rates soften, debt funds can deliver returns higher than the portfolio yield, and vice versa. Fixed deposits rate of return stays the same throughout its tenure.

Also, ascertaining ROI will help you make wise individual investment decisions and make choices that align with your long-term goals.

To conclude

With taxation at par, choosing fixed-income instruments requires a more strategic and well-informed approach. Before deciding, you must consider factors such as risk appetite, return on investment, investment horizon, and liquidity requirements. You must also explore different options available in the market and weigh the pros and cons of each.

If you want to start your investment journey but are unsure where to begin, turn to Tata Capital Wealth. Our team of financial experts can help you create a personalized investment portfolio tailored to your investment goals, risk appetite, and liquidity needs. We’ll guide you every step of the way to ensure you make the most of your investments.

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