Why Debt Mutual Funds Are Better Than Fixed Deposits

By | June 16, 2016

Why Debt Funds are Better

When you think of Mutual Funds, do the terms “share market”, and “equity” come to mind? Does it make you think twice because your money is at risk? All the same, Mutual Funds seem to be the golden apple that many of us are reluctant to reach out for. Equity Mutual Funds may seem like a very lucrative investment option if you are looking to achieve high returns over a period of time. However, depending on your risk tolerance and investment goals, there are a few situations where equity may not be the most suitable option for you.

Ask yourself these questions

  • Are you looking to invest for the short-term (are your goals less than 5 years away)?
  • Are you satisfied with returns of 8-9% on your investments?
  • Does market volatility give you sleepless nights?
  • Are you willing to forgo high returns for stability?

Here are your options

If you found yourself saying “yes” to any or all of the questions posed above, we have options for you. The options we’re talking about are Bank Fixed Deposits and Debt Mutual Funds. Both have their pros and cons. So, how do you decide which one to invest in?

We’ll lay out a short comparison and tell you which one of these investments is a better option for you.

Bank Fixed Deposits & Debt Mutual Funds

Fixed Deposits are considered to be the safest investment option. But, before you decide to stash your money in Fixed Deposits, give Debt Funds a chance. See how they both stack up and make an informed investment decision.

  • Safety of capital

Between Fixed Deposits and Debt Funds, the safety of capital is almost the same. But first, lets’s look at the credit ratings given to different investment instruments.

Rating Issuers What it means
Sovereign Government of India It can’t get any safer than this
AAA Most banks, PSUs, large financially stable private companies A very high degree of safety
AA Private companies A high degree of safety
BBB Private companies Below average safety
BB, B, C & lower Private companies Poor degree of safety

Most Fixed Deposits are AAA rated so the capital invested is highly safe. Debt Funds are not rated per se but you can judge their safety from the investment portfolio. They are usually rated between sovereign to AA.

  • Fixed Deposits give you assured returns / Debt Funds give you higher post-tax returns

When you invest in Fixed Deposits, the interest rate on your deposit gets fixed based on the term of the deposit. You can find out what the maturity amount on your Fixed Deposit will be at the time of opening the deposit.

While Debt Funds also offer 8-9% returns, these returns are not guaranteed. Why? This is because there could be a fluctuation in the interest rates.

Here’s a tip: Choose a Debt Fund with low volatility.  

  • Taxes eat away your income from Fixed Deposits

With a Fixed Deposit, you earn interest. Debt Funds provide capital appreciation and/or dividends.

The interest on Fixed Deposits is taxable as per the tax bracket you fall into. Debt funds are taxable as well, at your personal income tax rate for capital gains realised within 3 years (short term). However, for capital gains realised after 3 years (long term), you are taxed at 20 per cent after indexation. As indexation is taken into account, Debt Funds end up being more tax efficient than Fixed Deposits.

Additional Reading: Don’t Allow TDS To Dilute Your Fixed Deposit Income

  • Get better liquidity with Debt Funds

If you choose to close your Fixed Deposit prematurely, you will receive a lower rate of interest on your deposit. You will also need to pay a premature closure penalty.

Additional reading: FD breaking charges

Withdrawals from Debt Funds are much simpler. Debt Funds give you full liquidity of your deposit. You can withdraw any amount from the total value of your Debt Fund. The money gets credited to your account within 3 days.

But wait, some Debt Funds charge an exit load if you make withdrawals less than one year into the investment. This is usually 0.25-0.5%

  • Fixed Deposits =More Tax Paperwork

Since you need to pay taxes on the interest earned from Fixed Deposits, you need to maintain the related paperwork and calculate your interest income periodically.

With Debt Funds, you only need to pay capital gains tax on any withdrawals. Isn’t that simpler?

Don’t Debt Funds sound like a piece of cake?

If we’ve managed to help you choose between Fixed Deposits and Debt Funds, then go ahead and invest smartly. We know what we would choose, do you?

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

4 thoughts on “Why Debt Mutual Funds Are Better Than Fixed Deposits

  1. Jayjay Pereira

    I am an NRI and would like to invest close to US$1000000.00 in India in FD or any
    other program that would give a monthly income based on the interest after the first year.

    I’d like to invest the sum for 10 to 15 years, I would appreciate your advice as to the
    opportunities available to do so and what is the best interest to expect.

    Your feedback would be gratefully appreciated


  2. sairaj kale

    Hi i am working man my monthly salary is 75000 rs .i can invest around 60000.
    please provide me with information how and where to invest so that I will get long term benefit .

    1. Team BankBazaar

      Hi Sairaj, You can explore multiple investment options based on your eligibility and preferences here. Cheers, Team BankBazaar.


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