A financial instrument that lets you defer paying taxes until maturity is way superior to one where you need to report and pay tax on the income generated each year of investment. That is the single most important reason why debt mutual funds are superior to fixed deposits.  This is an illustration of the power of compounding with deferred taxation, suggested by subra(money.com).

I have already illustrated this point here: Budget 2014: Debt Mutual Funds vs. Fixed Deposits and in other posts. Subra felt it would nice to have a generic deferred taxation calculator and hence this post.

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Debt mutual funds are advertised as tax-efficient alternatives to fixed deposits. There is more to investing than  tax-efficiency. Investors must be aware of the associated volatility and how it can impact returns depending on the duration.

Post-tax debt fund returns may or may not be higher than post-tax fixed deposit returns.

The answer to the titular question depends on when you need the money and how you need the money.

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Although it has limited technical utility, the standard deviation is probably the simplest measure of understanding investment risk. Therefore, it has great practical value when it comes to 'product positioning' as the fund industry calls it.

'Where does a given fund fall in the risk vs reward map?'. AMC often given a product positioning risk vs reward 'map' in their presentations. This is for HDFC Equity Savings fund.

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In the last ten months, we have had three instances of credit rating downgrades in mutual fund portfolios. We had discussed these in some detail and also suggested ways to choose debt mutual funds with no credit risk and low volatility. In this post, let us look at how these funds have recovered and what we can learn about credit risk in debt mutual funds.

First some basics. A credit rating represents the perceived ability of a borrower to repay the principal and interest thereon. When the credit rating of a bond falls, its market value drops and it could become difficult to sell. Therefore the NAV of the fund that holds such bonds will fall. However, if the borrower is able to honor all payments, the NAV will recover. Read moreUnderstanding Credit Rating Risk in Debt Mutual Funds.

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Tax-free bonds are purchased in the secondary market via a Demat account when either new ones are not available or not attractive. How does one decide between buying existing tax-free bonds and new ones? Should we just look at the coupon rate and choose the one which is higher?

It depends on the purpose of the purchase. If someone is buying these bonds,

1. for income after retirement, then higher coupon rate may be the only thing that matters. There is no point comparing old bonds with new ones. If a higher payout is necessary then a premium may have to be paid to buy old bonds in the secondary market. Whether they will be available for sale or not is another matter!

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