Debt Funds Vs. FDs- Which Should You Choose In The Current Scenario?

Debt Funds Vs. FDs- Which Should You Choose In The Current Scenario?

This has been a topic of discussion for investors that which one is better Debt fund investment or Bank’s Fixed Deposit. Though in the current scenario the conservative investors have flocked towards FDs, Debt Funds is no less a good investment option. FDs don’t focus on market fluctuations or any other conditions and offer you the promised return. But it is not guaranteed for the Debt Schemes. But the current market trends have witnessed the transition from the traditional concept of investing in FDs to Debt Mutual Funds.

What do you mean by Debt Fund Investment?

Debt mutual funds add stability to your investment portfolio and don’t contribute to wealth appreciation like equities. Debt Schemes invest in fixed income instruments like bonds, government securities, commercial paper, corporate debt securities, treasury bills, and other similar money market instruments. You earn a steady interest income as pre-decided and therefore are sometimes known as fixed-income securities. Debt funds can be classified as – Dynamic Bond Funds, Income Funds, Short-Term and Ultra Short-Term Debt Funds, Liquid Funds, Gilt Funds, Credit Opportunities Funds, and Fixed Maturity Plans.

What are FDs?

It is an investment instrument offered by various banks and other non-banking financial companies. Here you invest a certain sum of money for a fixed time horizon and at a pre-discussed rate of interest. These interest rates vary from one company to another. Fixed Deposits can be classified as – Standard Term Deposits, Senior Citizen Fixed Deposits, Tax-Saving Fixed Deposit, Recurring Deposit, Flexible Fixed Deposit, Fixed Deposit for Non-Resident of India, and Corporate Fixed Deposits.

Comparison factors between Debt Mutual Funds and FDs

  • Risk Factor: While making an investment, looking into the risk factor is important. In the case of FDs, you don’t have to take up any risk and get a return as promised before investment. The returns from FDs are not dependent on the market fluctuations. The interest rate remains constant throughout the lock-in period of the investment.

But with Debt Mutual Funds India the risk level is higher along with offering chances to obtain higher returns. These funds are dependent on market fluctuations and certain other factors.

  • Returns: The returns from FDs are dependent on the tenure and the current interest rate prevailing in the market. The pivotal role in determining the market rate is the Repo rates. The interest rates remain fixed within the lock-in period and therefore you receive a fixed return as promised at the beginning.

The returns expected can be higher than FDs but is relatively lower in comparison to equity class or stocks. Moreover, there is no guaranteed return at the end of the investment time horizon.

  • Taxation: The interest earned from FDs is added with your total income, and the taxes are applied to that.

The dividends earned from Debt Hybrid Funds are not taxed. A Dividend Distribution Tax is deducted from the total returns and is handed over to the investors. If it is held for less than three years, the tax charged is similar to FDs. for more than 3 years, capital gain with indexation is 20%.

  • Liquidity: Your investment in FDs is fixed within a lock-in period and withdrawing within that period will charge you extra money.

In Debt Funds, you can redeem your investment at the ongoing NAV. this can be higher or lower than the one you started with. It involves an exit load.

  • Investment Option: For FDs, you can pay through a lump sum option both offline and online.

For Debt Funds, you can invest through SIP or Lump sum.

There are several things you need to consider before investing. Set a financial goal and investment horizon. Then consult an expert.

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