Skip to main content

How Fixed Deposits Compare With Debt Funds

Best SIP Funds to Invest Online 


Risk-averse investors in general and senior citizens in particular prefer to invest their hard earned money in bank fixed deposits. Even for most of the relatively suave investors, bank FDs still remain the most popular form of short-term investments (less than 5 years). However, if such investors are ready to take a little bit of additional risk in order to increase their returns, then they can consider debt mutual funds.

Here is a brief on debt funds and fixed deposits and the comparison of their features:

Debt funds: Debt fund is a broad category of mutual funds that seek to invest in securities generating fixed income. These securities can be government bonds, commercial papers, certificates of deposits, treasury bills, company bonds, debentures, money market instruments and/or other debt securities. Like other mutual funds, you can buy or redeem the units of debt funds at daily NAVs.

Fixed Deposits: Fixed deposit (also known as term deposit) is a fixed income instrument that offers capital and income guarantee till the date of the maturity of the instrument. The rate of interest also remains the same throughout the tenure of the investment.

How debt funds fare against fixed deposits

Capital protection: Your bank FDs (including both principal and interest component) of up to Rs 1 lakh in each bank is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the event of bank failure. Meaning, any bank deposits beyond Rs 1 lakh is as unsafe as any other financial instruments in the event of the failure of the bank.

Although the debt funds do not offer similar capital protection, the safety of such funds can be deduced from their underlying securities. These securities are rated by various credit rating agencies on the basis of their ability to pay back the maturity amount. Generally, debt funds invest in highly-rated securities where the possibility of default is negligible.

Return on investment: Bank FDs offer a fixed rate of interest irrespective of the movements in interest rates. For example, if you invest in an FD of 3 years tenure @ 7.9% p.a., you will continue to receive the same rate of interest till the end of the tenure, irrespective of the increase/decrease in the interest rate for that same tenure in the interim period. In otherwords, the rate of return of your bank FD is guaranteed.

Debt funds on the other hand, do not provide guaranteed returns. The return from a debt fund depends on the interest income earned from the underlying securities, the increase/decrease in the price of the securities, monetary policy and the investment management of the fund manager.

Liquidity: Banks allow premature withdrawal of FDs (except the tax-saving FDs) only in lieu of surrender charges or penalties. The liquidity of debt mutual funds is similar to that of equity mutual funds. Typically, you can withdraw your debt fund anytime without paying any charges.

Investment Costs: Typically, banks do not charge anything for investing in bank FDs. As far as debt funds are concerned, you will have to pay various annual recurring charges such as fund management fee, marketing & selling expense including agent commission, brokerage etc. As per SEBI regulations, the total annual recurring charges have been capped at 2.25% p.a. of the daily net assets.

Tax treatment: Interest earned from bank fixed deposits is added to your annual income for tax purposes. Hence, the tax on interest earned will depend on the tax slab that you come under. So, if your annual income falls in the 30% tax bracket, the interest earned from FD will attract 30% income tax. The banks deduct TDS if the interest earned on your fixed deposits crosses Rs 10,000 in a financial year.

In case of debt funds, short-term capital gains (gains made from investment of less than 3 year) is added to your annual income and taxed at applicable slabs. However, the return on investments of over 3 years is classified as long term capital gains, which is taxed at 20% with indexation benefits. The indexation benefit allows you to factor in inflation while calculating your capital gains. Therefore, even if the rate of returns from debt funds and fixed deposits are the same, you still stand to gain more from debt funds provided you come under 20% or 30% tax bracket and stay invested for more than 3 years.

Choosing between the two


Debt funds definitely score over bank fixed deposits in terms of return on investment, liquidity and tax treatment. Invest in debt funds if you need a place to park your funds but you do not have a fixed investment horizon or may need funds anytime. If your investment horizon is less than 3 months, invest in liquid funds instead of keeping your money in savings account. However, compare the FD rates offered with the returns provided by the debt funds for the same period of time.


SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds

For more information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...

Mutual Fund Review: Reliance Regular Savings Equity

    Despite high churn, Reliance Regular Savings Equity has managed to fetch good returns   In its short history, this one has made its mark. Though its annual and trailing returns are amazing, the fund started off on a lousy note (last two quarters of 2005). It managed to impress in 2006 and was turning out to be pretty average in 2007, till Omprakash Kuckian took over in November 2007 and wasted no time in changing the complexion of the portfolio. Exposure to Construction shot up to 28 per cent with almost 21 per cent cornered by Pratibha Industries and Madhucon Projects . Exposure to Engineering was yanked up (18.50%) while Financial Services lost its prime slot (dropped to 6.69%) and Auto was dumped. That quarter (December 2007), he delivered 54.66 per cent (category average: 25.70%).   When the market collapsed in 2008, thankfully the fund did not plummet abysmally. But even its high cash allocations could not cushion the fall which hovered around the category average. ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now