Debt Mutual Funds vs Fixed Deposits

28 March 2023
3 min read
Debt Mutual Funds vs Fixed Deposits
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Fixed Deposits have always been one of the front runners in the investment field to park one's savings. As a result, fixed deposits are widespread among investors, particularly regarding low-risk investments.

With an ever-changing financial landscape, FD offers risk-averse investors guaranteed returns and reasonable rates. Furthermore, regardless of any changes in the card rates, this option gives interest at a fixed rate.

However, there has been a massive increase in awareness of various investment options, with debt mutual funds unquestionably taking the lead. In such a case, it is critical to understand which solution is best for you. Is it an FD or a debt fund?

First, let us know the critical differences between the two.

Understanding Debt Mutual Funds and Fixed Deposits

Fixed deposits, also known as term deposits, are a type of savings account proffered by banks and other financial institutions. They typically offer a fixed interest rate and a fixed maturity date, and the institution guarantees the deposit.

They are typically deemed low-risk investments suitable for individuals who want to earn a fixed return on their savings.

On the other hand, debt mutual funds are mutual funds that invest in fixed-income securities such as bonds and debentures. They offer the potential for higher returns than fixed deposits but also bring more risk. The returns on debt funds are not fixed and are subject to market fluctuations. Thus, they suit individuals looking for slightly higher returns than fixed deposits with a higher risk.

Debt Mutual Funds VS Fixed Deposits

Let’s look at the differences between fixed deposits and debt funds. The table below helps you decide which investment is suitable for you.

Criteria

Debt Funds

Fixed Deposits

Interest Rates

7%-9%

6%-8%

Market Dependency

Because debt mutual funds are market-linked, they depend on market variations (bonds, etc.)

Fixed deposits are not associated with the market and are unaffected by stock market volatility.

Risk factor

Low to Moderate risks due to market fluctuations

Guaranteed returns; minimal risk

Dividend Option

Yes

No

Liquidity

High

One can redeem debt funds anytime. However, an exit load is sometimes imposed, which varies amongst fund houses (often approximately 1%).

Low

Most fixed deposit schemes allow early withdrawal with a penalty charge varying from 0.5% to 2%. However, some providers may not levy a penalty for early withdrawal.

Investment Option

You can choose either a SIP investment or a one-time investment

You can only opt for a lump-sum investment

Early Withdrawal

Allowed with or without exit load, depending on the mutual fund type.

A penalty is levied upon premature withdrawals.

Charges

Expenditure ratios can range from 0.2% to 2.25%. It is the fee fund houses charge for handling debt funds. Therefore, regular plans are subject to higher charges.

Banks and other financial institutions do not impose fees to open or manage an FD account.

Investment Expenditure

A nominal expense ratio is charged.

No management costs.

Summing Up

Debt Mutual Funds vs Fixed Deposits are both versatile modes of investment. You should invest your money in the same depending on the investment style, risk appetite, liquidity, and various factors.

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