Fixed Deposit vs. Debt Funds – Which Is Right for You?
Fixed deposits have been one of the most popular investment options because of their assured returns. If you are risk-averse, such deposits are an excellent choice as market-related risks do not affect the returns. However, these days, debt funds are a popular financial product. Read on to know the difference between both options to make the right decision.
What are debt funds?
Mutual funds that invest in fixed-income securities are known as debt funds. Generally, the corpus is invested in government bonds, treasury bills, corporate bonds, certificates of deposit, debentures, and other money market instruments.
Different categories of debt funds are as follows:
| Low-duration funds | Liquid funds | Money market funds | Overnight funds |
| Ultra-short duration funds | Corporate bond funds | Dynamic bond | Short-duration funds |
| Long-duration funds | Banking and public sector undertaking (PSU) funds | Credit risk funds | Floater funds |
| Medium-to-long- duration funds | Gilt funds | Medium-duration funds | Gilt funds (ten-year constant duration) |
Differences between fixed deposits (FDs) and debt funds
| FDs | Debt funds | |
| Investment risks | Almost negligible, as the fixed deposit interest ratess are pre-determined. | Involves some risk, as the returns are based on the market performance of the underlying securities. |
| Returns | Fixed at the time of investment and not affected by market movements. | Based on the performance of the securities, returns may be higher or lower than FD rates.
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| we Liquidity | The maturity date is fixed; however, you can withdraw the money beforehand by paying the premature withdrawal penalty. | These investments can be redeemed when required; however, some schemes may levy an exit load.
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| Charges | Post office FDs, as well as deposits offered by banks and non-banking financial companies (NBFCs), entail no additional charges to open and maintain an account. | Mutual fund houses charge some fees to manage the funds, and the expense ratio varies between 0.2% and 2.25%. |
| Tax benefits | If you invest in a tax-savingFD, it is eligible for exemptions under section 80C of the Income Tax Act, 1961. | Investments in debt funds are not eligible for any tax deductions. |
| Tax implications | The interest earned on the deposit gets added to your income and is taxed at your regular tax slab. | If you redeem the units in less than three years, the short-term capital gains tax is applicable as per your income tax slab.
If you redeem after three years, the long-term capital gains tax is charged at 20% post indexation.
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When choosing between fixed deposits and debt funds, capital protection is an important factor to consider. Moreover, you need to know your risk appetite, as returns in debt funds may get impacted due to market fluctuations.
In addition to banks, NBFCs like Mahindra Finance offer deposits with different tenures at attractive interest rates. Visit their website for more information.
