Debt Funds Vs Fixed Deposits: A Comparison

By BankBazaar | August 28, 2018

Think Fixed Deposits are way better than debt funds? Here’s why that isn’t always the case.

Debt Funds Vs Fixed Deposits: A Comparison

If you’ve been listening to your parents and grandparents talking about money, you must’ve heard a lot about the importance of Fixed Deposits. They have been a crucial part of every Indian household’s saving plan for a long time now. Why? They are undoubtedly one of the best investment instruments. Here are some of the great features that make them attractive:

  • They are pretty flexible tenure wise. Starting at 1 day, you can also keep a Fixed Deposit for up to ten years.
  • The returns are guaranteed (at least Rs. 1 lakh of your deposit is!)
  • They offer a decent rate of interest for your money to multiply
  • You can withdraw money partially or fully by paying penalty
  • You can take a loan against them

Fixed Deposits do sound amazing. Don’t they? What if we tell you there’s something almost like a Fixed Deposit that can help you multiply money but can do much more? Have you heard of debt funds? If not, we’ll tell you everything you need to know about them.

Additional Reading: Why Debt Funds Are A Good Investment For Beginners

Firstly, they are a type of Mutual Fund. The other types include—Equity Funds and Hybrid Funds. Out of all three, debt funds have the least risks associated with them.

How Good Are Debt Funds?

Debt funds may give a steady flow of income for you if you choose to get paid regularly. They also can provide higher returns in the long run when compared to Fixed Deposits. The best part? When you invest in debt funds for the long term, the taxation is better (20% with indexation) when compared to Fixed Deposits that are taxed as per your income slab (if you are in the highest tax bracket). Before investing in just any debt fund, you need to study its history to make sure you’re choosing the right one.

But first let’s compare the two in detail to see how debt funds are different from Fixed Deposits.

The Safety Factor

The only point where Fixed Deposits score is the higher safety factor. Although debt funds are the least risky of all Mutual Funds, Fixed Deposits are safer. Why? Debt funds being Mutual Funds depend on market fluctuations at the end of the day. The only thing that might affect your Fixed Deposit is a reduction in the rate of interest. To ensure that your money doesn’t remain locked in an FD for longer time at a low rate of interest, you can divide the money into multiple parts and invest each for a different period.

Additional Reading: All About Risks In Debt Funds

Rate Of Returns

While debt funds can give you an interest rate of about 8%-9%, Fixed Deposits can offer somewhere between 6%-7% depending on the bank.

Taxation

Returns you get from a Fixed Deposit are considered extra income and taxed as per your tax slab. On the other hand, in case of debt funds that have been held for more than 36 months, returns are considered to be long term capital gains (LTCG) and are hence taxed at 20% with indexation. This indexation allows you to adjust the purchase price so as to reflect the effect of inflation on it. This in turn reduces the overall capital gains. Lower capital gains will mean lower tax!

Additional Reading: Introduction To Debt Funds

Liquidity

Debt funds have higher liquidity compared to Fixed Deposits. If an ECS mandate is registered for a debt fund, your sale proceeds can get credited within 2-3 working days. Breaking a Fixed Deposit before its maturity date? Get ready to pay a penalty.

Additional Reading: Fixed Deposits Or Liquid Funds: Where To Park Your Surplus For Stable Returns?

Inflation Adaptability

Since both of these instruments are used to save and help beat inflation, it’s important to understand which can adapt better. The verdict is simple. If you wish to get maximum returns, you need to take a few risks. In that case, investing in a debt fund makes sense. On the other hand, if you’re someone who’s not willing to take any risk whatsoever, Fixed Deposits are a safe bet for you.

Before choosing whether to go for debt funds or Fixed Deposits, you must run some quick checks on your financial situation and risk appetite. Choose what suits you better.

Decided to go for Fixed Deposits? Explore the latest rates before applying.

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