Debt funds are preferred over other investment products, especially fixed deposits (FDs), for many reasons, including liquidity, and tax efficiency. An investor can withdraw money from debt funds like liquid funds whenever he wants without paying any penalty, whereas FDs generally have a penalty if they are withdrawn before maturity. Debt funds also offer greater flexibility of investing either a lump sum or periodical sum. Debts funds held for more than three years also offer indexation benefit on the cost value. The cost is adjusted for inflation index thereby increasing the cost and reducing capital gains payable at 20%.