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?
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
Jayjay
Hi Jayjay,
Here are some investments options you can check out. – Investment options In India For NRIs.
Cheers, Team BankBazaar
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 .
Hi Sairaj, You can explore multiple investment options based on your eligibility and preferences here. Cheers, Team BankBazaar.