Voluntary provident fund (VPF) vs Debt Mutual fund

The Union Budget 2021 has imposed taxation on interest earned on Voluntary Provident Fund (VPF) for contributions beyond Rs 2.5 lakh

What is a Voluntary Provident Fund?

VPF is an employee savings scheme that comes under the traditional provident fund savings scheme. However, under the VPF scheme, the contributor can decide the fixed amount for a monthly contribution. This contribution is not part of the 12% contribution by an employee towards his EPF.

Advantages

•             Safe option to invest: Since the Indian Government operates the scheme, the risk involved is relatively less as compared to other various schemes of investing; also it is easier and safer to invest via a VPF account.

•             High rate of interest: Under the VPF scheme, the VPF interest rate is usually around 8.50% p.a. for FY 21-22.

•             Easy to open account: It is simple and easy to open a VPF account. Employees can open a VPF account once by submitting the registration form. The current EPF account shall also act as the VPF account.

•             Simple transfer process:  If employees change their jobs, the process of transferring from the old company account to a new one is also quite simple.

Conclusion:

The VPF account is considered one of the best options to invest for a salaried person. Employees are eligible for tax benefits of up to Rs.1.5 lakh under Section 80C of the income Tax Act, 1961. The interest that is generated from these contributions is also generally exempt from tax. However, in case of VPF interest earned on employee contribution above Rs.2.5lakh p.a over Rs.1.75 Lakh basic salary., will be taxable. Investments towards a VPF account are viable because of its efficient rate of interest and tax benefits.

What is the meaning of a Debt Mutual Fund?

A debt mutual fund is a mutual fund scheme that invests in fixed income instruments, such as Government or Corporate Bonds, corporate debt securities, and money market instruments etc.  Debt funds are also referred to as Fixed Income Funds or Bond Fund.

What are the four Advantages of a Debt Mutual Fund?

1.       High liquidity: Debt mutual fund schemes, especially liquid funds, typically have a high degree of liquidity and investors may redeem their investments faster than others.

2.       Tax efficiency: Debt Mutual fund schemes do have long and short-term capital gains tax. However, the benefit of indexation increases after three years of holding and succeeding years.

3.       Flexibility: Using an STP, the debt mutual fund units can be easily transferred periodically to an equity scheme or any other scheme as per investor’s choice.

4.       Diversification of investment:  While choosing debt mutual funds, ensure to verify the portfolio. Generally, it is safer to invest in Debt Mutual Fund that invest Government securities and Government-issued papers, thereby reducing portfolio risk.

Conclusion

Firstly, Debt Mutual fund schemes help reduces overall portfolio risk as they help in diversification. When equity markets fall, debt investments cushion downside risks and may bring stability to returns.

Secondly, Debt Mutual funds are a good option for your short-term investment planning. The accumulated cash could be used for short-term goals like vacations, buying a gift, etc.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.