hould I go for Debt Fund or Bank FD currently?
Nowadays as the interest rates of Fixed Deposits are declining, people had started looking for a better alternatives to FDs. One of the alternatives which can stand against FDs is Debt Mutual Funds. So here we are sharing some points which will help you to get a better understanding of the two.
| Debt Mutual Fund | Bank FD |
| Debt Mutual Funds provide a return anywhere between 4% to 7%. In recent past i.e.from 3 to 5 years horizon, certain categories have even provided returns to the extent of 9% p.a. | Fixed Deposits provide a return anywhere between 4% to 6%. Earlier i.e 5 years back interest rates for FDs were somewhere 8%-9%. |
| * If held for less than 36 months – Then the Gains are taxed at the slab rate of the investor. * If held for more than 36 months, then the Gains are taxed with indexation benefit* |
The interest earned on FDs is added to income and taxed as per the Income Tax bracket. Also the bank deducts Tax at source i.e TDS before paying the interest if interest income exceeds Rs 10,000 in financial year. |
| Debt Mutual Funds invest in Government securities, PSU Bonds, Deposit Bank certificates, Commercial paper & Corporate papers .These categories are rated Sovereign or AAA or AA. They are considered to be the safest categories. | Bank FDs is always considered as one of the safest instrument. However ,in case of a bank default you may only receive Insurance protection on your FD up to Rs. 5 lakh subject to liquidity of the bank. |
| In Debt funds, you can withdraw any amount, any time from your funds and money will come to your bank account in 1 working days, which means Liquidity is medium. | In FDs, for withdrawing money before its term known as breaking of FD which results in penality and loss in interest rates. But you get your money on same working day so Liquidity is high. |
| In Debt Funds you can withdraw any amount ,any time and any number of times as per your requirement. However, redemption request has to be places atleast 24 hours prior. | In FDs premature withdrawal leads to penalty of average 0.5% of the invested amount as well as there will be a loss of 1% on the interest rates which was fixed at the time of investment. |
| In Debt funds there is no need for submission of any 15G /15Hforms, no TDS is deducted for residents. | In FDs, you need to annually submit 15G/15Hforms to save up the TDS. |
| In Debt funds, there are multiple categories where based on tenure and underlying instruments, one can generate good returns, even after maintaining capital safety. As well as all your money, will not be invested in one bond or instrument, it will be diversified amongst many papers which results in better returns along with less risk. | In FDs, all your money stays in one FD with a single bank. This may lead to concentration risk. |
Conclusion:
So we can see that in comparison to Fixed Deposits, Debt Mutual Funds provide better post- tax returns, high Liquidity as well as the same level of capital security. All these benefits make Debt Mutual Fund a better alternative against Fixed Deposits.