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

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

Mutual Fund Review: Reliance Regular Savings Balanced

Reliance Regular Savings Balanced fund has shown great resilience during market crash After a shaky start, this fund has established itself as a strong contender in this space. In the past three years it has ridden the market well by not only delivering during the market run-ups but also displaying resilience during the crash. In 2008, it witnessed the second lowest fall among its category and last year it was amongst the top three performers with a return of 76 per cent (category average: 61%).   The poor underperformance in 2006 can well be credited to the low equity allocation of the fund, which stood at just over 10 per cent for only four months that year. Though the fund has the leeway to go up to 75 per cent in equity, it has never touched that limit. In fact, it has exceeded 70 per cent in just five months in its entire history. During the crash of 2008, the fund managers had no problem going right down to 54 per cent (equity exposure). Fund managers Omprakash Kukian and A...

Stock Market Concepts: Derivatives and taxation

DERIVATIVES refer to an instrument, which derives its value from the value of something else — that is, an underlying asset. In India, the derivatives space has traditionally been the playground for large institutional investors who use it for hedging or for speculative activities. However, with time, we have seen a steep augmentation in the per capita income of an average Indian. Consequently, the appetite for investment in alternative instruments has transcended into the need to explore untested territories, and one of the most lucrative of all the available options, is the derivatives. Taxation Of Derivatives: Let's have a sharp overview of how taxability impacts the dealings in futures and options: Futures: Since, there is no transfer or delivery of the underlying asset in case of futures, the income or loss from it cannot be taxed under the head "capital gains". Therefore, depending upon the fact whether the assessee is a trader or an investor, the head of income...

Index funds / Exchange Traded Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Index funds / Exchange Traded Funds Index funds are those funds which replicate a particular stock market index like Nifty, Nifty Junior, Sensex etc. The fund's composition is a mirror image of the index. As there is no active management involved and the fund is expected to generate what a particular index is generating, the fund management charges are very low in these funds. Though over a long period of time good active management does play its part, but many times it has been seen that due to wrong calls of fund manager mutual fund returns suffer very badly. It is then we repent paying heavy charges for fund management. So, to diversify fund manager risk one may look at index funds too. Exchange traded funds also come under this category. As they can on...
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