Is Debt Funds Better than FDs: Know which a Better Investment Option is?
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Updated date : 26 February 2020
Debt Fund vs FD: Which is a Better Investment Option?
Bank’s fixed deposits are a major choice of investment for most of the conservative investors. As a risk-free, guaranteed return and one of the safest investment options, FDs have been a common choice of investment for investors from generation. However, in today’s day and age, many investors prefer investing in debt mutual fund. This is because debt funds offer more choices and have the potential to provide higher returns on investment.
Even though both the investment instruments serve a similar function, the difference is majorly analyzed based on taxation, safety, returns, liquidity, etc. In order to help our investors make an informed choice, further in this article we have discussed the difference between debt funds and FDs and has also explained which option of investment is best.
Fixed deposit schemes have a credit rating system which segregates and classify the investments on the basis of the overall safety of initial invested capital. The rating and classification system are based on various aspects such as securities and commodities, duration of investment, avenues of investment, the current status of the market, market volatility, etc. By analyzing these aspects, the credit rating system shows the real picture to the investor that, how the investment is expected to perform and how safe the investment is made.
Debt Mutual Fund
In debt fund, the returns totally depend on the market performance of the fund. Debt funds do not have any rating system, thus the investment safety is measured based on the investment portfolio. As the debt funds are closely monitored by the Securities and Exchange Board of India (SEBI) investment safety has proved to be highly effective in debt fund.
Fixed Deposit scheme does not allow any premature withdrawal before the completion of the maturity period. In case, the individual wants to make the withdrawal then he/she will have to break the FD account. Breaking the bank FD, results in payment of a penalty and a lower rate of interest. The penalties applicable are 0-15% of the initial invested amount.
In debt mutual fund, the investors can make a withdrawal of any amount anytime and the scheme will continue to function on the remaining amount. Premature withdrawals in debt mutual fund do not affect the interest rate of the fund. Moreover, the penalties are applicable only for the period of 1 year and charge an exit load, ranging from 0.25%-1%.
Fixed deposit account offers a fixed interest rate on investment and the returns are guaranteed at the end of the fund tenure. The current interest rates offered by fixed deposits are 7%-8% for more than 1 year of investment. The interest rate on fixed deposit schemes does not change even in case of market volatility. Thus, the FD offers a guaranteed return to the investors and help them to do proper financial planning in order to accumulate wealth in the long-term and achieve the financial objectives of life. Moreover, with the help of return calculator the investors can also calculate the exact amount of money they can expect to get and the total return on investment.
Debt Mutual Fund
Debt mutual fund does not offer any fixed rate of interest on investment. The returns on investment in debt mutual fund are not guaranteed and totally depend on the market performance of the fund. The investment returns in debt mutual fund are subject to the market volatility and involves risk. Debt mutual fund is a great investment option for investors who have a high-risk appetite and wishes to earn a high return on investment in a fixed period of time.
In order to understand the tax treatment that applies to both the FD and debt fund, it is important to understand the returns on investment offered by these funds. Fixed deposits offer ROI to the investors in the form of interest, whereas debt fund offers return in the form of dividend or capital appreciation. Thus, both the heads of income is taxed differently.
Depending on the head of income the individual falls under, FD attracts a high-income tax rate up to 30%. Even the tax is applied to the accrued interest. Fixed deposits do not offer any tax deduction to the investors. However, there are some tax-saving FDs which are specifically designed to offer a tax benefit to the investors under section 80C of Income Tax Act 1961. Besides this, the guaranteed returns product like money back insurance policy provides initial tax benefit, fixed and tax-free return to the investors in comparison to the fixed deposits.
Debt Mutual Fund
The tax rate on debt funds is similar to bank FDs held for 36 months or less. However, debt funds which are held for more than 36 months are taxed 20% with indexation and are classified as a long-term capital gain.
Wrapping it up!
Now based on the above-mentioned points it can be clearly stated that the returns generated by most of the debt funds are almost similar to the returns generated by the fixed deposits. However, if you are one of those investors who are ready to take a risk in order to achieve slightly higher reward as compared to FDs, then you can consider investing in debt fund. But if you want to have a safe and secured investment then you should consider investing in fixed deposits.
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