All of us must have some debt investments. At least that is what ‘asset allocation’ gurus will make you believe, so well, let us believe it.

HOWEVER, when somebody comes to me and says “I live frugally and save all the money that I can and keep it in Fixed deposits, Public Provident fund, national savings certificates, ….when do you think will I get rich.

I had to tell him this:

1. Debt instrument preserve your money: they preserve it exactly as it was! It does not grow in a debt instrument.

2. The ‘interest’ that you get in a debt instrument is equal to or less than inflation: Over a long period of time the interest is equal to inflation, that is all. That means the money is preserved, if at all.

3. The interest that you receive, howsoever meagre is taxed at regular rates: So if you are a tax payer a small part of the interest received is lost to taxation. In fact the bank may deduct about 10% tax, and the balance tax will have to be paid by you as an advance tax.

4. The impact of the taxation is so bad that the compounding over a long period of time is lost – or its impact reduced.

Moral of the story: Keeping your money in a debt instrument is for preserving it and not for growing it. You get rich only when your money grows, not when it gets preserved.

However while keeping in debt instruments you can do the following:

1. Keep it in an income deferred way: thus you postpone your income to the time that you withdraw and

2. Convert the income from a regular income to a capital gains kinda income.

These two steps ensure that the debt portion of your money also grows at a reasonably faster rate than a bank fixed deposit.

Have written many posts on this…so please search on the blog..using tax deferral, fixed deposit vs income funds, deferred taxation….etc….you will find the article.


Just Do It!!

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  1. Debt instruments (Debt MF Schemes), of the GROWTH type are considered as long term investments when held for more than 3 years now. They are taxed at a reduced rate of 20% on the INDEXED gains (not actual gains). In the last few years, the indexation has been high enough to bring actual tax liability to almost nil.
    Thanks to subra’s advice, I’ve been able to invest a good chunk of my savings in such debt funds.

  2. My recent visit to US, I was confused a lot about student loan & mortgages. While the US inflation is also around 4-5% (in reality it is much higher, ask any California resident), student loans for 30-40 yrs duration are offered at 2-3% interest rates and home loans for the same duration are also available from 3.25% on wards. With inflation, even banks are losing money that too in the long term. One may argue that banks are lending customer money but then am sure even bank profits are channeled into lending which they are happy to earn 2-3% for 30-40 yrs. No wonder when RBI offered $ return of 7-8% last year with minimum tkt size of $0.5 million, it was over subscribed. Also even in INR currency, FIsI seems happy with 7% returns post tax and their inflows into debt is much higher than equity. Debt seem to be not bad as we think.

  3. Thank you Subra.

    Personally for me this blog is an eye opener. However, I unable to understand the last 2 points that you suggest on keeping the debt instrumnets.Hope I will get to read more on what you are actually suggesting !

  4. @Sunil: I think the author wants to highlight the primary difference or advantages of debt mutual funds over traditional bank fixed deposits. This is because you do not pay any tax in debt MF till you redeem and if you redeem it after 3 years, you get indexation benefit.

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