When A Fixed Deposit Is As Good As a Debt Fund

michael longmire lhltMGdohc8 unsplash
michael longmire lhltMGdohc8 unsplash

With the skyrocketing prices of everything and the decreasing state of the economy, unemployment, negative growth, how high you may earn it isn’t sufficient. What probably helps you to survive in these difficult financial times if you have invested your funds in an investment scheme. Well, you can utilize your money to invest in different schemes like an Fixed Deposit, which offers less risk than a mutual fund which revolves around the market demand and supply. You can also compare FD interest rates of different banks to get a high rate of interest.

Fixed deposits v/s debt mutual funds:

Fixed deposits are the investment schemes in which you invest the lump-sum money for a fixed tenure ranging between 7 days to 10 years. You can get returns on FD at a fixed return as determined by the bank following the RBI policy. They are considered as the safest means of investment and can get higher returns than saving accounts.

Debt mutual funds are the funds in which investors funds are invested in debt instruments which have fixed income such as government securities, treasury bills, money market instruments, corporate bonds etc. They are also known as Fixed Income Funds or Bond Funds.

Why are debt funds better than fixed deposits?

 Debt funds can be considered a better option than a fixed deposit because the interest rate on the fixed deposits has been continuously declining post-demonetization. However, you can get higher returns on the debt mutual funds. The rate of interest on debt mutual funds can vary from 7%-9%.

Another reason why debt mutual funds offer high return is the taxation policy. The funds invested in fixed deposits are taxable as per the tax slab rates of your income. However, you can invest in tax-saving FD, where you can tax exemption up to Rs. 1.5 lakhs on your investment. However, in India, mutual funds are taxed on the capital gains based on the type of debt instrument and the duration of the investment. The debt mutual funds which are invested for less than 3 years are taxed as per the tax slab rate of the investor. On the other hand, the long term capital gains on the debt mutual funds are taxed at 20%.

Apart from that, debt mutual funds also offer more liquidity as compared to the fixed deposits. While you can withdraw the amount in fixed deposits, there are certain restrictions on the amount and duration of the investments. Also, you may have to pay the penalty fees for premature withdrawal of fixed deposits.

Scenarios when a fixed deposit can be as good as debt mutual funds:

As fixed deposits are taxable in India, you must invest in short term FDs. Instead of depositing the entire funds in one FD, you invest in multiple FDs. By doing so, you can save the tax on your investments. If the investments in fixed deposits are less than 1.2 lakhs, then the interest earned on the investments will not come under the taxable bracket.

To get higher returns, you can choose compounded FDs where interest is paid at the end of maturity period instead of on a monthly, quarterly or annual basis. Also, you must invest in short term FDs to beat inflation.

However, if you have any confusion about where you should invest your funds, you should not invest your money in debt mutual funds. In such a scenario, a fixed deposit with a lesser risk can be an ideal choice for investment.


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