New Delhi, April 10 -- For years, long-term debt funds enjoyed a cosy place in the portfolios of conservative Indian investors. Thanks to tax arbitrage benefits, especially for those in higher tax brackets, they were an attractive alternative to traditional fixed deposits (FDs).

Until April 1, 2023, debt funds had a clear tax advantage: long-term capital gains (LTCG) held for over three years qualified for indexation benefits and were taxed at 20%. On the other hand, interest from FDs were taxed at the applicable tax slab, which was as high as 30%.

But long-term debt funds have become like an endangered species in investment portfolios in recent few years. With the rising interest rate scenario, the interest rates offered by fixed depos...