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What is the difference between debt funds and fixed deposit?

I have been investing in FD but I want to start investing in debt funds. Should I invest in debt fund or FD? Is debt fund risky?

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Pijush Kanti Biswas

Debt fund is a mutual fund which invests most of the money gather from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.

Fixed Deposits(FDs) is investment instrument provided by banks or NBFCs, which gives you fixed return on money you parked in these institutes, until the given maturity date.

Definitely investment in debt mutual funds is much better option than parking your money in bank Fixed Deposits(FDs).

Reason being:

  • No deduction of taxes or TDS on the earning from debt funds. Whereas, the interest earned on FDs are fully taxable at the normal rate applicable to the investor along with yearly deduct TDS on interest income from the FDs.
  • Debt funds are highly liquid which can be easily converted in to cash that too within a day time.
  • Debt funds generally gives you higher return on investment as compared to FDs.
  • Debt funds are much flexible in terms of transfer where as amount invested on FDs cannot be transferred to other banks.

Both fixed deposits (FDs) and debt mutual funds are low-risk investment financial instruments and were used to be seen as comparable investment options. But recently after demonetisation, major Indian banks, in both public and private sector, have revised the interest rates they offer on FDs. Country’s largest lender, State Bank of India (SBI), cut its interest rate on FDs to 6.90% for maturity period of 1-year and to 6.50% for maturity periods between 3 to 10 years, which is lowest in the industry now. Whereas, return on debt mutual funds are around 9-11% annually. In such a scenario, parking your surplus cash in debt mutual funds is a wise investment.

While it is true to say that debt funds are much safer mutual funds, but they are not risk free like the way bank fixed deposits (FDs) are. Still debt funds are best option for an investor with low risk appetite aspiring for higher returns as compared to FDs.

Some popular example of debts funds:

Happy Investing!

Arpit Chandak

This is the most common question now a days for the investors as most of the people have started shifting towards debt funds. The major difference between them is that mutual funds have the advantage of tax adjusted returns over the fixed deposits.

Differences between debt funds and fixed deposits:

Tax: Returns from fixed deposits is your interest income and hence, tax is deducted on it. Banks also deduct TDS on interest from fixed deposits. However, for debt funds, there is no such TDS deduction. If they are on hold for more than 36 months, then only 20% tax is levied .

Returns: Fixed deposits returns are usually in the range of 6% to 7% only.  However, the returns from debt funds have proven to be slightly higher in comparison to fixed deposits. Few debt funds such as Intermediate government bond category has provided returns even up to 10.08%.

Risk: Although bank deposits are considered to be the safest, mutual fund industry is also closely regulated and monitored by the Securities and Exchange Board of India (SEBI).

Liquidity: Fixed deposits have a lock-in period i.e. you withdraw before maturity date, you have to pay certain charges. On the other hand, debt funds are completely liquid. You can withdraw your amount anytime plus your returns on that part of investment.

Flexibility: The amount once invested in fixed deposits, cannot be transferred to other banks. However, debt funds provide flexibility in terms of transfer. You can transfer the amount from one fund to another in case the particular fund is not performing up to the expectations.

Top performing debt funds:

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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