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Debt Funds Vs RD: Which is a Better Investment Option?

26 July 2022

Debt funds and recurring deposits are two forms of investments that can be used to help you build wealth. Both are low-risk investments that allow you to invest small amounts of money for a very long time. However, there are some things that set them apart from each other.

Debt funds are a kind of investment fund that invests in debt securities. They are usually managed by a professional fund manager and have an investment objective to achieve capital gains through the purchase of debt instruments. These funds are quite similar to mutual funds, except that they invest primarily in debt instruments (debt securities). 

Recurring deposits are essentially recurring deposits made with an individual bank account or even other financial institutions like credit card companies or insurance companies. These deposits are used by people who have a fixed amount of money each month (or in some cases every week) that they can put towards the repayment of their debts without having to worry about interest rates or maturity dates.

What is Debt Fund?

Debt Fund Meaning - Debt funds are similar to mutual funds in that they pool together money from many investors and make investments with the aim of growing your wealth over time.

The difference between them is that debt funds typically invest in bonds and other securities, while mutual funds invest in stocks or other types of securities.

If you're an investor looking for a way to safely invest in debt securities, then a debt fund might be the perfect choice for you. The idea behind these funds is simple: buy a basket of debt securities with some liquidity built into it.

This means that investors can sell their stake at any time without losing any money if they feel like it's not working out as planned.

One of the biggest advantages of using debt mutual funds is that there will be less risk than if you were investing in individual companies directly because there's less volatility since the value of each security isn't known at the time of purchase (which means there's no need to worry about whether or not the investment will go up or down).

What is Recurring Deposit?

Recurring Deposit Meaning: Recurring deposit account is simply a fixed-term deposit account that has a fixed rate of interest. They are used to provide regular income and to invest long-term in financial markets.

RD allows you to earn fixed interests on the amount invested at frequent intervals until the investment matures or a predetermined term ends. The total amount (i.e., the capital invested and the interest accumulated) is disbursed to the investor after the maturity period completes.

RD vs Debt Funds: Comparative Analysis

Debt funds are a type of investment that is used by individuals, organizations and governments to fund debt. These investments are made with money borrowed from a bank or other creditor.

Recurring deposits are similar to debt funds, but they allow you to borrow money on credit terms at a fixed interest rate for a specific period of time.

Both types of investments have their pros and cons, so it's important to understand which one is right for you before making any decisions.

 

Debt Funds

Recurring Deposit

Investment Type

Debt mutual funds are mutual funds that invest mainly in a combination of debt or fixed income securities such as Government Securities, Treasury Bills, Money Market instruments, Corporate Bonds, and other debt securities.

Term deposits where people with a regular income can deposit a fixed amount every month for a particular period of time.

Returns

Around 7-8% on average.

Around 5-7% to the investor.

Investment Amount

Can be customised.

Is fixed and cannot be changed.

Liquidity

More liquidity as compared to bank recurring deposits

Liquid but premature withdrawal would incur a penalty with a fixed rate

Taxation

Lower after 3 years than RD

Same rate throughout 

Risks of Investing in Debt Funds

When it comes to investing in debt funds in India, there are drawbacks that you should be aware of. 

1) Low Returns

Debt funds in India offer returns of 5-8% per annum. However, the rate of return is not as high as other equity options like mutual funds and insurance funds.

This means that investors who choose to invest in debt funds will have to wait longer for their money to grow and for the money to compound.

2) Not Fully Safe

Debt funds are not fully safe from the risks associated with them. The risk of default is high because lenders usually charge interest rates that are higher than what they get from deposits on savings accounts.

This means that if the borrower fails to pay back the loan, then there's no guarantee that you'll get your money back in full.

3) Not for the Long Term

If you're thinking of investing long-term then it's better to look at other options such as mutual funds or insurance companies instead since they offer better rates of return and have lower risk levels compared to debt funds.

Risks of Investing in a Recurring Deposit

Recurring Deposits in India are a type of account that offers the benefit of regular deposits. The main advantage is that you can invest with your money for a longer period of time and still get the same amount of interest you would have gotten on an investment made upfront.

This can be very useful if you need to make a larger investment, but do not have enough cash to do so all at once.

However, there are drawbacks to this type of account as well:

1) Cannot Withdraw The Money Anytime You Wish

The first drawback is that you cannot withdraw the money anytime you wish. The money is locked up and you need to wait for a fixed period before withdrawing it.

2) Amount Decided To Invest Monthly Cannot Be Changed

The second drawback is that you cannot change the amount you'd like to invest monthly once decided. Recurring deposits have a fixed amount, which means there is no flexibility in changing the investment amount once decided.

3) Comparatively Lower Rate Of Interest

Thirdly, recurring deposits have a comparatively lower rate of interest than regular bank accounts because they require more effort on your part. It has a lower rate of interest than some other types of investment accounts. If you want higher interest rates on your portfolio, then this might not be for you.

Conclusion

Hopefully, this article has provided a better understanding of recurring deposits and debt funds.

To recap, it's important to use both for the health of your portfolio. Keep the RD for essential expenditures and liquid cash, which you can withdraw in case of emergencies. For everything else, invest in debt mutual funds, but keep an eye on your bank balance to ensure that you still have enough liquid cash on hand if you come up against unforeseen expenses.

Of course, in the end, only you will know what works best for your financial situation, so go with what you feel comfortable with.

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

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Research Analyst - Bavadharini KS

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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