Debt MFs Invest In G-secs, Offer More Liquidity Than Direct Bonds

Abhinandan Gupta email

I am 50 years old, and have an investible surplus of Rs 2 lakh. I want to invest in debt instruments, but not debt mutual funds (MFs). Should I invest in bonds or fixed deposits (FDs)? If I invest in bonds, should I choose Government securities (G-secs) or corporate bonds?

An FD may be more suitable as it will offer better liquidity. It is easy to open and permits premature withdrawal, though with penalty. Also, the Deposit Insurance and Credit Guarantee Corporation scheme covers up to Rs 5 lakh per depositor per bank.

In contrast, G-secs and corporate bonds are typically held till maturity to avoid market volatility and interest rate risk and are, therefore, less liquid. Only some of them are available in the secondary market.

Interest from bonds and FDs is added to your income and taxed as per your slab.

If your investment horizon is 2-3 years, you may consider debt MFs as an option. They offer options across tenures and also higher liquidity than bonds. These funds invest in G-secs, corporate bonds and Treasury Bills. Unlike FDs, only the redeemed amount is taxed, which may help manage tax liability.

Suhel Chander CFP®, Handholding Financials

Ramesh Singh, email

I made long-term capital gains (LTCG) of Rs 17 lakh in November 2025 from selling a house. I own another house and will retire next year. Should I invest in an FD or Senior Citizens’ Savings Scheme (SCSS)? I have Rs 85 lakh in Employees’ Provident Fund (EPF) and my wife of Rs 50 lakh.

The Rs 17 lakh capital gain is supplementary. If your monthly expenses are covered, the combined EPF corpus of Rs 1.35 crore is strong. Most fixed-income options have fully taxable interest, and post-tax returns may not beat inflation.

Since you will not buy another house, Section 54 exemption does not apply. Alternatives are Section 54EC bonds, SCSS and bank FDs.

Over five years, Section 54EC bonds issued by NHAI or REC offer about 5.25 per cent. Interest is fully taxable at slab rates and at 30 per cent, give about 3.70 per cent net. SCSS offers about 8.20 per cent, (fully taxable), and at 30 per cent, gives around 5.70 per cent net. Under the old tax regime, up to Rs 1.50 lakh invested qualifies for deduction in the year of investment. Bank FDs in large public or private banks offer interest rates of 6.75-7.20 per cent, and small finance banks up to 8.20 per cent. Interest is fully taxable (at slab rates) and at 30 per cent, translate to 4.70-5.70 per cent net.

For growth and an inflation hedge, a hybrid mutual fund (MF) with roughly 65 per cent in equity may deliver 8-10 per cent compounded annual growth rate (CAGR), with gains taxed at 12.50 per cent after a Rs 1.25 lakh exemption. A 6 per cent systematic withdrawal plan (SWP) from the Rs 1.35 crore corpus will provide approximately Rs 67,500 per month, while allowing the corpus to grow to Rs 1.59 crore. In comparison, SCSS will generate about Rs 64,500 per month (excluding tax) and FDs about Rs 55,000 per month.

SCSS offers steady income with safety, a hybrid MF with SWP provides growth and tax efficiency, and 54EC bonds will give capital gains tax exemption.

HINA SHAH CFP® Luhem²wealth Rakesh Sharma email

Rakesh Sharma email

I am 45 years old having a corpus of Rs 45 lakh in equity MFs, which I have been saving for my daughter’s higher education. She will go to college in three years. Should I deposit the entire money in an FD or debt MF for now, or wait for another year?

Shifting to debt funds three years early is premature, as it stifles growth and the gains are taxed at slab rates.

You may invest in a conservative hybrid MF or a multi-asset allocation fund (MAAF) to address volatility. These funds maintain a minimum 10 per cent exposure to equities for growth, in debt for stability, and commodities for hedge against inflation. The fund manager actively rebalances allocations depending on market, and fund strategy.

Alternatively, you can switch 50 per cent of your equity portfolio to debt funds for now by booking profits, invest the remaining 50 per cent in a conservative hybrid fund or MAAF, and shift the accumulated market value to debt funds after two years. This approach reduces tax liability while maintaining growth and managing risk.

Uma S. Chander, CFP®, Handholding Financials