Deposits, as the name suggests, are nothing but a form of savings made in a bank. These deposits are quite safe and earn an interest over time. However, at times their rate of return is not great since they are offered by the banks on low interest rates. Debt mutual funds on the other hand, offer higher returns and are an easy way to diversify your investment portfolio. This makes them more lucrative than fixed deposits especially in today’s market scenario where interest rates have fallen considerably.
WHAT IS A DEBT MUTUAL FUND?
A debt mutual fund is a type of mutual fund that allows you to invest in fixed income instruments like Government and Corporate Bonds, investment-grade debt securities, money market instruments, commercial paper and floating rate notes. A debt fund can be useful in hedging your portfolio or to generate wealth.
Debt mutual funds are ideal for investors looking for consistent returns and capital preservation. A debt fund investment primarily consists of corporate and government bonds that are known to offer a high degree of safety, as well as a competitive return on investment. The market value of equity mutual funds fluctuates more than debt funds do and so investors who plan to invest for the long term might find debt mutual funds more suitable for their goals.
WHAT IS A FIXED DEPOSIT?
Fixed Deposit is a financial instrument provided by the Bank and NBFC, which allows you to deposit your funds for a fixed term and earn returns at a fixed interest rate. Plus, Fixed Deposits offer flexible tenures, making them the best investment option available today.
Fixed Deposits are a popular investment that can help you park your money as well as earn interest. Its returns are not just limited to the principal amount but also on the interest rate and tenure as well. You can choose Fixed Deposits for any tenure ranging from 3 months to 5 years depending on your risk appetite. The investment is tax-free under Section 80C of the Income Tax Act, 1961
THE SHIFT FROM FDs TO DEBT MUTUAL FUNDS
Debt mutual funds have become a popular choice lately, as they offer high potential returns, while providing safe capital appreciation. People are shifting towards these funds because of its steady returns and dividend payouts. This is why, we recommend that you diversify your investments between debt mutual funds and fixed deposit (FD) to maximize both stability and growth of your savings.
After the demonetization of 2016, debt mutual funds cashed their opportunity to attract investors by offering them reduced rates. This attracted many new investors and these investors started considering debt mutual funds as a better option than fixed deposits. This was how the big shift happened and people started to choose debt mutual funds over fixed deposits for their investment goal.
DEBT MUTUAL FUNDS VS FIXED DEPOSITS
Debt mutual funds are the higher risk investment tool which is suited for investors who like to take on risk and get rewarded with higher gains. However, they come with an element of uncertainty and risk associated with them and may not be suitable for all kinds of investors. So, debt mutual funds can be a safer investment option if you have adequate knowledge about it.
- Rate of return: 7% to 9% in debt funds & 6% to 8% in FD.
- Dividend option: Available in debt funds but not in a FD.
- Risk: Moderate in debt funds but low in FD.
- Liquidity: Debt funds have higher liquidity than FD.
- Interest rate: Interest rate in debt funds depends on the overall market movement, and, interest rate on fixed deposits is based on the chosen tenure.
- Investment option: mutual funds offer investment options, while FD has one type of lump-sum investment.
- Early withdrawal: Is allowed in debt funds with or without exit load, however, a penalty is levied upon premature withdrawal from FD.
Conclusion:
Debt funds are beneficial for the investor as the debt investment provides returns based on the prevailing interest rates. Moreover, Debt funds allow you to withdraw your money without any penalties before or upon maturity of your investment. Also, they are less volatile than equity mutual funds. When compared with normal savings bank accounts, it gives better rates of interest and helps investors save tax efficiently through systematic investment plans (SIPs) or systematic withdrawal plans (SWPs).
