Debt Funds v/s Fixed Deposits. Which is Better?

A traditional and popular investment option for Indian households is a fixed deposit in a bank. Most investors use bank fixed deposits for regular income and for achieving their financial goals.

However, the interest rates on the deposits are falling and investors are looking for alternate options like debt funds.

Here is why debt funds are better than fixed deposits.

Capital protection

The subsidiary of RBI, Deposit Insurance and Credit Guarantee Corporation insures an amount of INR 1 lakh in case of bank failure. This includes all the accounts and your fixed deposits. This means if you have made an investment exceeding INR 1 lakh, there will be a risk associated with it.

However, debt funds do not have capital protection but you can mitigate the risks by investing in funds based on their credit risk and the profile of the securities. Debt funds invest in securities that have a very high rating and the risk is very low.

Returns

This is another reason why debt funds are better than fixed deposits. When you open an FD with the bank, the interest rate will be booked and the same will be applicable throughout the investment period.

In the case of debt funds, the returns depend on the capital gains and the interest income. Hence, there is a possibility of earning a higher return on the amount of investment made by you.

Taxation

The interest that you earn on fixed deposits will be added to your total income and will be taxed as per your income tax slab.

With regard to debt funds, the short-term capital gain will be taxed as per your income tax slab and the long-term capital gain will be taxed at the rate of 20% with a benefit of indexation. Thus, debt funds are more efficient than fixed deposits especially if you fall under the tax slab of 30% and investing for more than 3 years.

Liquidity

Liquidity is another prominent reason why debt funds are better than fixed deposits. In case of an FD, you cannot withdraw the amount before the end of the investment period. There is a lock-in period on the fixed deposits.

In the case of debt funds, only the fixed maturity plans have redemption restrictions. They charge an exit load but allow you to withdraw the funds before the specified time. Ultra-short-term funds, short-term debt funds, and liquid debt funds do not charge any exit load as well, which makes these funds a good option to meet short-term goals or if you need money during an emergency.

These are a few reasons why you should make an investment in a debt fund instead of a fixed deposit. Earlier, fixed deposits were preferred due to the ability to generate stable returns at a negligible risk. However, it is now beneficial for you to choose a debt fund over a fixed deposit.

Debt funds are secure, stable, and have the potential to generate higher returns in the form of capital gains. Choose the right debt fund for your investment and see the investment grow over a period. It will also help in the diversification of your portfolio.

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