Debt Funds vs FD which one is better!

Table of Contents :

  • What is FD
  • What is Debt Funds
  • Difference between FD and Debt Funds
  • Which one is better between FD and Debt Funds
  • Conclusion

FD (Fixed Deposit) :

FD is an investment tool in which an investor gets fixed returns in the fixed time period predetermined by scheme. In a Fixed Deposit, you put a lump sum in your bank for a fixed tenure at an agreed rate of interest. At the end of the tenure, you receive the amount you have invested plus compound interest.

Debt Funds :

Debt Fund is a type of Mutual Fund where money is get invested in debt instruments on which we get a fixed rate of returns but better than FD with a slightly higher risk. A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation.

Difference between FD and Debt Funds :

1. Taxation :-

Interest earned on FDs is taxable as per your income tax slab, while debt funds are taxed based on the holding period. If you hold a debt fund for less than three years, the gains are added to your income and taxed accordingly. If you hold it for more than three years, you will be taxed at a flat rate of 20%.

2. Inflation :-

Inflation can erode the value of your investments over time. FDs offer fixed returns, which means that real returns can be negative if inflation is higher than the interest rate. Debt funds, on the other hand, can offer higher returns that can potentially beat inflation and generate higher real returns.

3. Diversification :-

Debt funds invest in a diversified portfolio of fixed income securities, which can help reduce risk and provide better returns. FDs, on the other hand, are a single investment option and do not offer diversification benefits. So, in diversification Debt Funds are better in the race of FD vs Debt Funds.

4. Risk :-

If we talk about low risk investments than FD is a low risk investment but it also offers low returns. Debt funds, on the other hand, are subject to market risk and offer higher returns than FDs. FDs are better for low risk investors and that is the reason in India FDs are prefer from generations as an investment option.

5. Lock-in period :-

FDs usually come with a lock-in period, which can range from a few days to several years, depending on the bank and the type of FD. During the lock-in period, you cannot withdraw your funds without paying a penalty. Debt funds, on the other hand, do not have a lock-in period, and you can withdraw your funds at any time without any penalty (except for some tax implications).

6. Liquidity :-

While FDs offer high liquidity compared to other fixed-income investments, they are still less liquid than debt funds. In debt funds we can redeem any time. That money will get credit within few working days in the account. This can be helpful if you need to access your funds in an emergency. FDs are less liquid assets than Debt Funds.

7. Return on investment :-

Debt funds usually offer higher returns than FDs, especially over the long term. This is because debt funds invest in a diversified portfolio of fixed income securities, which can provide better returns compared to a single FD. However, it’s important to note that debt funds are subject to market risk, and there is no garuantee of returns.

8. Investment amount :-

FDs usually require a minimum investment amount, which can range from a few thousand rupees to several lakhs of rupees. Debt funds, on the other hand, allow you to invest small amounts, as low as Rs. 500 or Rs. 1,000, making them accessible to a wider range of investors. So, in the competition between FD vs Debt Funds, debt funds have won the battle here. You can start SIP in debt funds and SIP has its own advantages.

9. Flexibility :-

Debt funds offer greater flexibility compared to FDs, in terms of investment tenure, frequency of investment, and the option to invest through SIPs (systematic investment plans). This can help you plan your investments more effectively and make the most of market opportunities. You can also switch easily in Debt Funds if there is any problem in the mutual fund house whereas in FDs it is not easy to do that.

Which one is better :

FDs are considered low-risk investments, as they offer fixed returns over a fixed tenure. The returns are generally lower than debt funds but are guaranteed. FDs are also highly liquid, meaning that you can withdraw your funds before maturity, but there may be a penalty for doing so.

On the other hand, debt funds invest in fixed income securities such as government bonds, corporate bonds, and money market instruments. The returns on debt funds are not fixed and can vary based on market conditions. However, they typically offer higher returns than FDs, especially over the long term. Debt funds also offer greater flexibility in terms of investment amount, tenure, and liquidity, making them suitable for short-term and long-term investment goals.

Conclusion :

In summary, both debt funds and FDs have their own advantages and disadvantages, and the choice between the two depends on your investment goals, risk appetite, tax considerations and liquidity requirements. It’s important to evaluate these factors carefully and choose an investment option that aligns with your financial goals.

It depends on your investment goals and risk appetite. Debt funds and fixed deposits (FDs) are both investment options that offer fixed returns but they differ in terms of their risk profile, returns, and liquidity.

If you are looking for a low-risk investment option with guaranteed returns and high liquidity, FDs may be a better choice. However, if you are willing to take on slightly higher risk for potentially higher returns and greater flexibility, debt funds may be a better option. Ultimately, it is important to consult with a financial advisor and carefully consider your investment goals and risk tolerance before making a decision.

This is all for information and education purpose only.

Thank You

Happy Investing

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