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How are you all? 

Have you ever planned to invest and conversed about it with your grandparents, I can surely say, your grandparents would have suggested you to invest in Fixed Deposits, and if you ask their views about debt mutual funds, their only reply will be, it is risky!

Fixed deposits have been a major choice of conservative investors for their investment, over a generation, because of its risk-free nature, and guaranteed return yielding feature. It has been a part of every person's investments plan, over decades, but recently, Fixed Deposits, has witnessed a slow but marked transition to debt funds.

If you are confused, where to invest your funds, either in Fixed deposits or Debt Mutual Funds, then read this blog. Through this blog, we are going to explain to you how Debt Mutual Funds are a better investment option than Fixed Deposits? 


What are Debt Mutual Funds? 

Debt Funds, also popular as bond funds, are a kind of mutual fund scheme, that invests in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments. In these funds, the issuer of the funds decides the rate of interest, as per the investor will receive the benefit and decides the maturity period of investors fund.

What is a Fixed Deposit or FD? 

Fixed Deposit or FD is a kind of investment instrument offered by both, banks and non-banking financial companies, where investors invest money and earn with a higher rate of interest than a savings account. You can deposit a lump sum of money in a fixed deposit for a specific period.

Differences Between the Two!

Well, both FD and Debt Mutual Funds, are good kinds of investment instrument, both have their own significances and benefits, but as Debt funds are the closest to the FDs in terms of risk, and also gives good returns over short-term investment, it is considered best investment option over Fixed Deposits.

Let’s have a look on the significances of Debt Mutual Funds over Fixed Deposits:

Investment Safety

Fixed Deposits: FD schemes do have a credit rating system, that isolate and classify the investments on the basis of the safety of invested funds. The classification and rating system are carried on the basis of the analysis of various factors like commodities and securities or avenues being invested in, the duration, the current market status, its volatility, etc. This analysis of various aspects gives you the real picture of how your investment can be expected to perform and how safe your investment is.

Debt Mutual Fund: Debt funds are a kind of mutual fund, and hence its safety and returns are based on market performance. They do not comprise of any rating system, and the safety of investment is measured on the basis of the investment portfolio. Debt funds, like other mutual funds, are regulated by the Securities Exchange Board of India (SEBI), hence investments safety has proved to be highly active in case of debt mutual funds.

Early Withdrawal

Fixed Deposits: Fixed Deposits or FD’s, do not allow its investors for an early or premature withdrawal of their funds, before the completion of maturity period. However, if the investor is in urgent need of money and wants to withdraw money, before the maturity period, they would have to break their FD account. Breaking a fixed deposit results in a lower rate of interest and payment of penalty. The penalties range from 0-15% of the initial invested amount.

Debt Mutual Fund: Debt mutual funds are liquid in nature, that is the investor of debt mutual funds can sell or redeem their unit at any time. They do not have to worry about the maturity period or lock-in period. Also, the investor can make a withdrawal of amounts at any time, and the mutual fund continues to function with the remaining amount. No penalties are charged over the premature withdrawal of the amount from debt funds, as the TER or Total Expense Ratio, is charged initially to investors.

Investment Returns

Fixed Deposit: Fixed Deposit, offers a return based on a fixed interest rate, on your investments. In FD’s the return is guaranteed, at the end of the investment period or at the completion of the maturity period. The current interest rates are around 8% - 9% for investments for more than one year. This does not change due even in financial crises or volatility.

Debt Mutual Funds: Debt Mutual funds are market associated funds and do not guarantee a fixed return, but it does give returns based on the high rate of returns than Fixed Deposits, which is 10-12%, that too in short period of time. The rate of returns in debt mutual funds is subject to market volatility and fluctuations in interest rates.

Tax Exemptions

Fixed Deposits: Fixed Deposits, do not offer any tax benefit to its investors. In fact, returns generated on Fixed deposits attract a high rate of tax that is, up to 30%, depending on your personal income tax slab.

Debt mutual funds: Debt Mutual Funds do provide tax benefits to its investors. Short-term gains (i.e. less than 3 years) on debt funds are taxable as per your individual tax slab rate. Long-term gains (i.e. up to 3 years or more) on debt funds are taxable at 20% with the benefit of indexation.

As of now, you are clear with the different factors associated with both FD’s and debt mutual funds. Both FD’s and Debt mutual funds are considered the best investment option for investors who have a low-risk profile and short-investment tenure, but debt mutual funds are preferred more, as it gives good returns based on the high rate of return than FD’s.

If you are also planning to start your investment, don’t get confused between the two, analyze your risk appetite and investment tenure, and then select the best suitable option for you.

Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).