Debt Fund vs Fixed Deposit : Which is better?

(Last Updated On: March 29, 2017)

Debt fund vs Fixed Deposit

There is always a dilemma when you have surplus money. Whether to invest a lump-sum amount in bank fixed deposit or to some other instrument that gives more return than FD with the same amount of risk. This post will cover Debt Fund vs Fixed deposit in detail and hopefully, help you understand caveats of the same.

In India, fixed deposits are considered as one of the most preferred and safest saving instruments with almost negligible default chance.  Although, the interest portion in fixed deposits are taxed annually while in a case of debt fund the indexation comes into picture when the debt fund units are sold. If units are held for more than 36 months, then gain is considered as long term capital gain and if units are sold with the gain in 36 months of time then it is called short-term capital. Due to this difference in taxation consideration,  it is very much possible that debt fund giving return of 8% can outperform and build good corpus than the fixed deposit having a coupon rate of 10%.

Debt funds are managed by professionals that invest in high rated fixed income earning investments like State or Central government bonds, RBI bonds, various corporate deposits, money market instruments etc. It is an investment pool like mutual fund or exchange traded fund. People like you and me with an excess amount of money lying with us and who want to earn better returns than normal bank FD and do not want to take any risk are usually investing in debt funds. One can get the benefit of indexation in case of long-term capital gain and reduced tax burden to a certain extent. This is possible in debt fund and not in fixed deposit.

READ  What are Direct plans in Mutual funds?

It is true that debt funds are more volatile than FD. But do note that the volatility is very short term. In case of the debt fund, the nature of volatility is shorter and hence, in the long run, it can be said that volatility will not affect much to debt fund.

As far as documentation is concerned, Creating an FD, maintaining records for your tax payment, calculating tax income and so on can involve a lot of paperwork. Even sometimes it may happen that bank has deducted the taxes and FD holder wants to have premature withdrawal, in that case, FD holder will get less amount than expected as per the penalty applicable on premature withdrawal.

It is to be noted that there are so many debt funds available in the market and it becomes very confusing for the investor which one to chose. Unlike FD which is just like pure vanilla ice-cream. One can go to a bank and complete the documentation part, select tenure and that’s it, he or she gets FD certificate.

the n case of the debt fund, it is managed by highly professional individuals who does a lot of research and analysis before investing the pool of investment and they mostly invest in high rated fixed income securities.  In FD, you have to rely on your skills and there is no much research or analysis involve, to be honest.

Diversification is the key to generate better returns. In debt funds, professionals generally invest in the large pool of investment hence even if one is not performing well, it can adjust it with the rest of pool.

READ  SIP vs PPF : A Detailed Comparison

Debt Fund vs Fixed Deposit Conclusion Table

Debt Fund FD
Debt fund are linked to the market and risk of default is always there Fixed deposit are the safest and risk of default is negligible
The returns are almost certain and usually higher than fixed deposits post taxation. The returns are very much certain and less than debt fund post taxation.
Debt fund can be redeemed and proceed can be credited to investor account within a day time with ECS mandate. Though withdrawal before 1 years may levy exit load Fixed deposit can be withdrawn within one or two days time. Premature withdrawal attracts penalty.
Taxation comes into the picture at the time of redemption of the debt fund.  If units are sold after three years then return will be considered as long-term capital gain while if it’s sold before three years with gain then its short-term capital gain. Interest in bank FDs are charged annually irrespective of income tax slab of investors and are deducted as TDS itself.

To conclude, it is always better to diversify your investment and allow it to grow and take a little risk. Investment in debt fund can give higher post-tax return than traditional FD. Research well while investing in debt funds and grow your money faster. 🙂 !!

Post A Reply