Your Queries: Mutual Funds| Compare your debt fund schemes with category peers before switching

© Provided by The Financial Express However, for new investors coming in the yields are relatively lower than those prevalent earlier.

Why am I earning such pathetic returns from debt mutual funds? Is it better to invest in bank deposits or in NPS for the long term?

-Vijay Dubey

Fixed-income instruments are relatively less volatile than equities, and lend stability to the portfolio and protect against purchasing power erosion due to inflation. Investments in fixed income instruments / debt funds are typically subject to interest rate risk and credit risk. The RBI measures announced along with abundant liquidity in the banking system have resulted in yields falling substantially, particularly at the shorter end of the yield curve. The sharp fall in yields has in fact benefitted most debt funds, given the inverse relationship between interest rates and bond prices. However, for new investors coming in the yields are relatively lower than those prevalent earlier.

You should evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one. Banks too have cut down on their deposit rates in line with the sharp fall in market interest rates. Interest from bank deposits for longer holder periods (>3 years) are taxed at marginal rate, compared to a favourable tax rate of 20% post indexation of costs in case of debt mutual funds.

NPS is considered as a long term investment vehicle for building a retirement corpus. One may opt for a 100% fixed-income option under the ‘Active choice’ option. However, the fixed-income portion of the investment too is invested into corporate bonds and G-secs and hence would fetch similar yields as those in mutual funds.

Stamp duty is now payable on mutual funds purchase. For capital gains calculation what is the cost of acquisition now?

-A Venkat

Since July 1, 2020, a stamp duty of 0.005% (Rs 5 for every Rs 1 lakh) has been levied on purchase of mutual funds. The stamp duty, however, will not be levied on redemption of units. The acquisition cost shall be inclusive of the stamp duty for computation of capital gains. If an investor invests Rs 1 lakh, of which Rs 5 is deducted as stamp duty, and investment grows to a value of Rs 1,10,000 the gains would be Rs 10,000 and not Rs 10,005.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to