Debt Funds vs Fixed Deposits – Why Debt Funds Are Better Than Fixed Deposits

For time unknown every individual has held this firm belief that fixed deposit is way better than other investment options in the absence of deeper knowledge about other investment instruments. Hence, it has remained a conventional investment choice of most prospective investors in the country. Moreover, most of them believe that both fixed deposit and investment instruments like debt funds are almost similar to each other or that a fixed deposit is a lot better than a debt fund. Although the two might look the same from a distance, when delved deeper it appears that debt fund and fixed deposit are completely different from each other based on various aspects. But before understanding the difference and learning about how a debt fund is better than a fixed deposit, it is important to know what exactly is a debt fund and a fixed deposit. 

What is a debt fund?

A debt fund is a type of mutual fund that collects a pool of funds from different investors and compiles it together to invest it in different types of instruments, which includes Treasury Bills, Money Market instruments Government and Corporate Bonds and more. The mutual debt fund is quite safer than equity mutual funds as the volatility rate is quite low and hence is appropriate for investments of a shorter duration. 

What is a fixed deposit?

In a fixed deposit, an investor needs to invest a certain amount of money for a fixed period of time against a fixed rate of interest. Where the interest rate compounds annually and after the maturity of the amount, the investor gets a lumpsum amount. A fixed deposit is a kind of investment that is free from market-related volatility. Hence no amount of risk is involved when investing in a fixed deposit. 

Reasons for debt funds being better than fixed deposit 

In our country, a fixed deposit has always been considered better than any other kind of investment options. But, there are manifold reasons that make debt fund a more lucrative investment option. Keep reading below to know how they are better than fixed deposits. 

Liquidity

Debt funds are quite easy to liquidate. They can be easily redeemed, where there are no restrictions on the upper limit and it can be claimed at any time irrespective of the date of maturity. Although it might be subject to exit load charges, it will only be levied on the amount redeemed and the rest of the invested amount will not get affected. 

 

However, in the case of a fixed deposit, the investor is not allowed to withdraw the invested amount until the tenure ends. You may opt for a premature withdrawal of the amount, but for that, you need to pay a penalty charge on the entire amount even if you want a partial withdrawal. 

Taxation

Debt funds are not liable for taxation. Taxes are only implied when you opt to redeem a part of the amount. Thus the entire amount remains taxless under the debt fund. But after three years, the investor becomes accountable for taxes which is around 20%. But, since indexation benefits are levied on debt mutual funds, the payable tax becomes significantly less. 

 

In the case of fixed deposits, the amount is liable for taxation if the interest component exceeds Rs. 10 thousand annually. Moreover, if the PAN stays up to date with the financial institution, the interest is 10% and if not, then it is 20%. The tax rate of FD is no different from the tax bracket. 

Returns

The returns of debt funds are significantly higher. Investments made on certain specific instruments such as Government bonds have given a return of 10.08% in a span of just three years. This cannot be matched with the returns received on fixed deposits. 

 

The fixed deposit interest rate is quite low when compared with the returns on debt funds. The maximum returns you can get on your sum range from 5% to 7.25% and with a minimum lock-in period of more than three years. Moreover, the interest rate on fixed deposits is gradually going down due to the present economic scenario. 

Investment method

One can invest in a debt fund either via a third party or directly through Asset Management Companies (AMCs) seamlessly. 

In the case of a fixed deposit, an investor can only invest his lumpsum amount either in a non-banking financial institution (NBFC) or a bank. 

A fixed deposit has remained the common choice among Indians since time immemorial due to its assured returns. But times have changed and there are now better investment options available in the market such as debt funds. Debt funds are less volatile than equity funds, but it also gives a significantly higher return than a fixed deposit. It is time for investors to make a change and dive into the niche of debt mutual funds. 

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