What are the factors to consider before investing in any ultra short term debt fund and how does it differ from FD for tax and returns? This is from a perspective of 3-4 years of investment.
Factors to consider while investing in Ultra Short Term Debt Funds-
Credit Quality of underlying papers, Average Maturity, Modified Duration, and AUM.
Regarding taxation, both FDs and Debt Funds have same tax treatment if your holding period is less than 3 years. However, if it is more than 3 years, then regarding debt funds it is 20% with indexation benefit. Hence, they are more tax efficient compared to Bank FDs. Also, due to no TDS concept in MF, each year available for compounding will be more in MF than FDs as banks deduct TDS every year.