Should you invest in debt mutual funds or FDs? Choose wisely

 

Should you invest in debt

mutual funds or FDs?

  

When it comes to investing in mutual funds or FDs, many of us think about the safety first and then about the returns. This is because no one wants to gamble with their much hard-earned money. Hence, fixed deposits and gold became our favorite investment options because they have no risk in terms of money loss. But just for choosing safe investment options, we forget that fixed deposits may not be the most ideal investment option for us to get higher return. 

Investors whose priority is capital safety can go for debt mutual funds. A debt mutual fund comes under a category of mutual fund that invests in fixed income securities issued by the various companies and governments. Capital safety, the rate of returns, lock-in period and taxation are some of the key features that help you to select between debt mutual fund and fixed deposits.  Read this article to clear your doubt and choose the best investment plan.

Let’s know the difference between debt mutual funds and fixed deposits that can help you to compare the two investment options and choose accordingly.

1.     Rate of returns

Returns from Fixed deposits are fixed. The rates of return you get in fixed deposits are in the range of 5% to 6.5% currently. In this the interest rates remain the same during the fixed tenure. But at time of reinvestment in the fixed deposit the interest rates might be different at that time.

 On the other hand, Debt mutual fund returns are not assured and are linked to the debt market. Debt mutual funds have the potential to deliver higher returns as compared to fixed deposits as fund managers make investment decisions based on the current debt market scenarios. Debt mutual funds generate higher real returns. In this you get the return above the inflation rate.

 2.     Capital safety:

When it comes to capital protection, bank fixed deposits have an edge over debt mutual funds. However, fund houses cannot guarantee capital safety. In the case of FDs, capital protection differs from the issuer of the fixed deposits. Non-banking financial companies give higher returns on fixed deposits but it also comes with higher risk than a bank deposit. Though capital erosion risk is very less in debt funds as the portfolio consists of well researched securities and also due to diversification.

 3.     Liquidity:

When you invest in fixed deposits you are asked to choose a time period you want to invest.  Once you deposit money for 3, 5 or 10 years you cannot redeem money before maturity. And if you want to redeem your fixed deposits before the maturity date you have to pay penalties. But in Debt mutual funds you can redeem your fund anytime you want except a few debt funds.

 4.     Taxation: 

Debt mutual funds taxation structure is better than FD. Debt mutual funds come with lots of indexation benefits. There are two types of taxation on debt mutual funds: one is short-term capital gains and another is long term capital gains. It’s a short-term capital gain if the units are redeemed before three years and gains are taxed as per the income slab. If you stay invested for more than three years, you are eligible for long-term capital taxation at 20% with indexation.

 Conclusion

As a best financial advisor in Lucknow we suggest that the Debt mutual funds are a best investment option. It is a relatively stable investment option along with inflation-beating returns. Investors who are in the higher tax brackets can also invest in debt mutual funds for tax-efficient returns. That’s all! Hope this article is helpful to you. For any query contact us.