Those currently invested in debt funds are advised to remain invested and people with ample idle money should also concentrate on investing their surplus funds.

Individuals rush to banks to exchange and deposit their old currency notes post demonetisation. As per RBI figures, banks have received deposits worth Rs 4.08 lakh crore (total deposits less exchange amount less withdrawals) during November 10 to November 18, 2016. Banks have enough deposits, but they lack investment options to utilise the funds to generate returns. Data from CMIE shows that banks' credit to commercial sector is shrinking. It grew at 7.5 per cent y-o-y for the week ended November 11, 2016, compared to 9.5 per cent for the same period last year. Hemant Beniwal, a CFP Professional, says: "All major banks have ample liquidity and credit off-take is at its lowest levels in the past 10 years." In fact, all major lenders have reduced their FD rates after facing the cash flood. He further adds, "SBI has substantially reduced its FD rates by 1.5 to 2 per cent for clients who would like to invest more than Rs 1crore. Soon it will have no choice but to offer these rates for retail."

No doubt, the government's demonetisation move has left all kinds of savers confused, but people with swelling savings accounts can make intelligent use of money by investing in debt funds. It will help them earn better returns than what a savings bank account offer.

Going by AMFI figures, the Indian mutual fund industry is growing with total assets touching Rs 17 lakh crore in October 2016. Debt-oriented schemes comprise 45.4 per cent of industry assets, up from 44.1 per cent in October last year. Debt-oriented funds are more common with institutional investors holding 64 per cent of total debt investments. Whereas, individual investors are mostly invested into equity oriented schemes with 85 per cent share.

Favourable Environment

Debt funds are expected to gain due to increase in bond prices in a falling interest rate scenario. Historically, debt funds have generated better post-tax returns than fixed deposit. Currently, HDFC is offering interest rate of 7 per cent for a one-year FD, whereas short-term debt funds have generated one-year return of 10.5 per cent. While past performance should not be the measure of future performance, the environment is in favour of debt schemes. As per CMIE, the yield on 10-year government dated securities has fallen from 6.9 per cent on 8 November 2016 to 6.37 per cent on 23 November 2016. All the other government-dated securities with maturities of one year, five year and 15 year, have witnessed a fall in yield in the range of 38-53 basis points (bps).

Invest in Debt

Those currently invested in debt funds are advised to remain invested and people with ample idle money should also concentrate on investing their surplus funds.

Do not invest haphazardly. Your investment decision should be based on your goals. You should always have some cash with you for contingencies, but as cash in paper currency has become a mess, you can keep funds for your emergency kitty in liquid funds. Keep at least three to six months of funds or higher depending on your need. Liquid fund ensures high level of liquidity and flexibility to access cash invested at a days notice. "In personal finance, 'liquid' means anything that is almost as good as cash. Money market funds or liquid funds as they are commonly known are one of the safest places to park your money for short periods of time.", says Beniwal.

Next are the ultra short term funds where you can invest for up to a year. Short-term funds invest in shorter-dated paper, that is, debt paper with lower maturity. A significant chunk is invested in cash/call money. These funds are suitable for investment horizon of up to three years. Other debt funds including income funds, gilt funds, credit opportunities and other dynamically managed debt funds are meant for longer term exposure and bear relatively higher risk, which needs to be managed efficiently to reap benefits.

As far as taxation is concerned, short-term capital gains (units held for 36 months or less) arising out of debt funds are added to income and taxed as per the applicable tax slab rate. Long-term capital gains are taxed at 20 per cent after providing for taxation. For long-term goals, equities are more favourable. Make objective-based investments. You could hire or take the services of a financial planner before investing.