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Debt Mutual funds vs Bank deposits

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Since the start of 2012, there's been a huge debate onto the selection of appropriate investment option among Bank deposits and debt funds or debt Mutual funds. After the announcement of CRR cut by 50 basis points on January 22 this year, it is expected that RBI may move from its stance of controlling inflation to Increasing growth, which means easing of interest rates. If this is going to happen then what should an Investor do? Should they lock in their savings into highly paying fixed deposits at the rate which may not be there after few months or should they take advantage of falling interest rates by investing in debt funds. Through this article I am going to give you a brief idea on what to do after understanding the basics.

What constitutes Bank deposits?

Bank deposits comprises of saving deposits and Fixed deposits which in technical terms called as demand deposits and Term deposits. Most of the banks are offering Fixed deposits rates to the tune of 9.50% p.a for 1/3/5 year term. Senior citizens will be provided 0.5% extra. Effective 25th October'2011 RBI has also deregulated the saving account interest rates which results into many banks start offering 6%-7% on the saving account balances. But here one should understand that these rates are not permanent in nature. As and when RBI starts with its rate cut spree and liquidity starts increasing in the market, all these rates are bound to come down.



What constitutes debt Funds?

Debt funds or Debt mutual funds are those instruments where fund manager invests in the short and long term debt instruments issued by banks, corporates and even government. The papers that the fund manager purchases vary in duration of maturity so these debt funds are sometimes called as duration funds. The investment is generally in the debt papers which carries a fixed coupon rate and pays at regular intervals so debt funds are sometimes called as Income fund also. So depending on where the fund manager has invested and what's the duration of papers

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