Fixed Deposits or Debt Funds, Which One Is Better to Invest?

Why FDs Were Preferred?

The fixed deposits of banks were the most preferred investment schemes of various investors. The reasons for the same are:

• The low risk was associated with them

• FDs were easy to go schemes of the investment

• The guaranteed returns can be earned from them

• FDs are easy to monitor

• The returns of FD are not dependent on market performance

Reasons for Shift from Conventional Fixed Deposits to Mutual Funds:

There was a time when people use every extra cash they earn like increment, bonus, in Fixed Deposits. We all have seen the time when our parents and grandparents invest their hard-earned money in FDs or Fixed Deposits. FDs were the best option for earning interest and ensuring the protection of capital. So, what has changed now is a question? Why mutual funds have become the most preferred investment option.

It was the time of demonetization in India when the availability of tax saving mutual funds raised the prominence. At that time, the debt mutual funds were giving good returns with liquidity and most of the investors with low risk decided to shift to them.

Why Invest in the Debt Mutual Funds?

The debt mutual funds are the closest to FDs when we talk about risk. The major goal of a debt fund is to provide investors a steady income throughout the tenure of the investment. Therefore, it is crucial to select a suitable time zone of fund investment.

You can get to know about different debt funds and the duration of these funds through fund houses or some third-party or online. In this way, you will be able to know the performance of the funds with their respective rates of interest. This also makes it easier to take advantage of the volatility of the market and make an informed decision.

Fixed Deposits Vs. Debt Mutual Funds

Let us now look at some of the major differences between fixed deposits and mutual funds. Mentioned below is the table that will help you to decide the type of investment suitable to you:

The banks provide a pre-set rate of interest for FDs as per the chosen tenure. The returns of debt funds, to some extent, depend on the rate of interest movements. They can generate some moderate returns, which is more than fixed deposits in the form of appreciation of capital and regular income.

A good thing to know about fixed deposits is that the highs and lows of the market do not impact the returns that are earned. Therefore, the debt funds outdo the FDs by a large margin at the time of low interest rates in the Indian economy.

Adaptability towards Inflation of FDs and Debt Mutual Funds

We all know that inflation is one thing that puts a dent in our savings because it leads to currency value loss. The debt mutual funds can make peace with the effects of inflation. For example, you have invested in the FD at the interest rate of 6% and the rate of inflation is 5%, then the adjusted return will only be 1%. However, debt mutual funds can deliver comparatively higher returns.

Tax on Fixed Deposits and Debt Mutual Funds

For short-term gains that are for less than three years on the debt mutual funds are taxable according to the rate of individual tax slab. For long-term gains on debt mutual funds that are for three or more years are taxed at the rate of 20% with indexation benefits.

On the other hand for the returns of fixed deposits, the gains are taxed according to individual tax slab.

Summing it Up

Let us finalize it with the following example:

The choice is all yours but you should weigh your decision according to your risk appetite, investment goals, and time horizon. In this way, when the rate of interest is at peak and you consider different prospects of economic growth, then opting for debt mutual funds over fixed deposits is suggested.