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

Mirae Asset Healthcare Fund

Best SIP Funds to Invest Online   Mirae Asset Global Investments (India) has launched Mirae Asset Healthcare Fund. The NFO of the fund will be open from June 11, 2018 to June 25, 2018. Mirae Asset Healthcare Fund is an open-ended equity scheme investing in healthcare and allied sectors. The scheme will invest in Indian equities and equity related securities of companies that are likely to benefit either directly or indirectly from healthcare and allied sectors. The investment strategy of this scheme aims to maintain a concentrated portfolio of 30-40 stocks. Healthcare is a broad secular theme that includes pharma, hospitals, diagnostics, insurance and other allied sectors. The fund will have the flexibility to invest across markets capitalization and style in selecting investment opportunities within this theme. Neelesh Surana and Vrijesh Kasera will manage this fund. In a press release, Swarup Mohanty, CEO, Mirae Asset Global Inves...

How to Decide your asset allocation with Mutual Funds?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) How to Decide your asset allocation ? The funds that base their equity allocation on market valuation have given stable returns in the past. Pick these if you are a buy-and-forget investor. Small investors are often victims of greed and fear. When markets are rising, greed makes the small investor increase his exposure to stocks. And when stocks crash to low levels, fear makes him redeem his investments. But there are a few funds that avoid this risk by continuously changing the asset mix of their portfolios. Their allocation to equity is not based on the fund manager's outlook for the market, but on its valuations. Our top pick is the Franklin Templeton Dynamic PE Ratio Fund, a fund of funds that divides its corpus between two schemes from the same fund house-the...

GOLD ETFs

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   GOLD ETFs       Gold funds and ETFs have also lost the tax advantage they enjoyed over physical gold after the Budget changed the rules for long-term capital gains from non-equity funds.   Last year, gold exchange traded funds ( ETFs ) had gained a great deal from the depreciation in the rupee and the UPA government's move to impose additional levy on gold imports, making it an attractive option for investors. The landed price of the yellow metal had surged, pushing up the net asset value ( NAV ) of gold ETFs. However, the recent budget proposal by Finance Minister Arun Jaitley has thrown a spanner in the works for gold fund investors. The revised tax structure for all non-equity funds, includi...

IIFL NCDs

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India) IIFL NCDs IIF's six-year unsecured NCD 2012 Risk-wary investors should stay away from this issue, and even, risk-taking ones should think twice It is a public issue of unsecured redeemable non-convertible debentures ( NCDs ) by India Infoline Finance ( IIF ), an unlisted company, which is a 98.9 per cent subsidiary of India Infoline, a listed company. The issue seeks to raise Rs 250 crore with an option to retain over-subscription up to Rs 250 crore taking the total potential issue amount to Rs 500 crore. It will be open for public subscription from September 5 to September 18 with a minimum application size of Rs 5,000 in the form of five NCDs of face value Rs 1,000, TENURE & RATES: IIF will redeem the NCDs at the end of six years, and investors wanting out before six years will be able to sell the...

Tax saving tools to maximise returns

  An Individual can claim a deduction up to Rs 1 lakh U/S 80C of the Income-Tax Act, 1961 ('Act') by incurring a certain expenditure or making specified investments. Few of the popular schemes which are generally availed of by the individuals, inter-alia, include the following: Expenditure-Related Deductions Broadly, the expenditure-related deductions include tuition fees and home loan payments.    Tuition fees for full-time education in any Indian university, college, school, and educational institution, for any two children is eligible for deduction. However, development fees or donations are not considered.    The principal amount re-paid against a home loan to banks or certain category of employers is also eligible for deduction. Stamp duty, registration fees and other expenses incurred for the purpose of acquisition of such a house property are also eligible for deduction.    It should, however, be noted that the cost of renovation/house repairs after the completio...
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