The biggest difference between debt funds and fixed deposits is that debt funds do not offer assured returns on the investment as the returns are linked to the market conditions, while fixed deposit schemes offer fixed returns irrespective of how the market performs.
This article covers:
- What Is Debt Mutual Funds Meaning
- FD Meaning
- Debt Fund Vs FD – Which is better
- Best Debt Mutual Funds
- Debt Fund Vs FD- Quick Summary
- Debt Fund Vs FD- Frequently Asked Questions
What Is Debt Mutual Funds Meaning
Debt mutual funds collect money from many investors and then invest in various debt securities such as treasury bills, corporate bonds, government bonds, money market instruments, etc. This fund is also known as a bond fund. Generally, debt mutual funds give comparatively better returns than fixed deposits.
However, debt mutual funds are associated with risks like interest risk, default risk, reinvestment risk, credit risk, and inflation risk.
There can be various instances in your life when you can invest in debt funds. For example, if you want to buy a vehicle or plan to go for a vacation in 1 to 2 years, in this case, you should invest in debt mutual funds because they give stable returns, and you can sleep peacefully knowing that you can withdraw that amount whenever you need it.
A fixed deposit scheme allows you to invest a one-time or lump sum investment with a bank or other financial institution like NBFC (Non-Banking Financial Company) for a fixed period at a predetermined rate of interest. At the end of the period, you will receive the maturity amount, which includes the invested amount and the total interest earned.
The advantage of a fixed deposit is that it offers a fixed rate of return, regardless of the stock market or economic conditions. The rate of return is decided by the central bank of India (RBI). The returns on FDs are higher than on savings accounts.
Fixed deposits are the safest investment option in India as it allows you to preserve your capital. No matter how much the interest rates are, when it comes to safe investments, people opt for investing their money in fixed deposits. However, it is associated with a few risks, including inflation risk and liquidity risk.
Debt Fund Vs FD – Which is better
The primary difference between a debt fund and an FD is that while a debt fund generates returns based on interest income as well as capital gains or losses, an FD generates returns solely based on interest income.
|Parameters||Debt funds||Fixed deposits|
|Returns||The rate of returns on debt funds can range from 7 to 9%.||The rate of returns on fixed deposits is fixed, and it can range from 4 to 8%.|
|Managing fees||There is a minimal expense fee charged for managing,||There is no expense fee charged for managing.|
|Risk||Debt mutual funds are associated with risks like interest risk, default risk, reinvestment risk, credit risk, and inflation risk.||Fixed deposit is associated with a few risks, including inflation risk, liquidity risk, and default risk.|
|Way of investment||You can invest in debt funds through SIP or one-time.||You can invest in fixed deposits through a one-time investment.|
|Withdrawal||Investors can redeem the units of the debt mutual fund any time they want to without paying any exit load.||Fixed deposit investments can be withdrawn at the time of maturity, and in case the investor needs the money, he has to pay a penalty if he/she withdraws before the maturity date.|
|Taxation||The rate of tax on debt mutual funds is determined by the investment period of the funds. Short-term capital gains (STCG): If you hold the debt funds for up to 3 years (36 months), the gains earned on the investment are known as STCG and the gains are taxed as per the income tax slab rates in which the investor falls under. Long-term capital gains (LTCG): If you hold the debt funds for more than 3 years (36 months), then gains earned on the investment are known as LTCG and they will also be taxed according to the investors’ income tax slabs and there will be no indexation benefits.||Interest earned on fixed deposits (FDs) is considered fully taxable. The amount of TDS deducted depends on the interest income earned. If the interest income exceeds Rs 40,000, TDS will be deducted at a rate of 10%. If you do not have a PAN card, the bank can deduct 20% of TDS. On the other hand, if the interest earned on a fixed deposit is less than Rs 40,000, it is exempt from TDS. If you do not fall under the tax slab rate, you can submit forms 15G and 15H to avoid TDS.|
Debt Fund Vs FD – Tenure of investment
Fixed deposits have a fixed tenure of investment, which can range from a few days to 10 years. Once you invest in a fixed deposit, you cannot withdraw the funds before the maturity date without incurring a penalty. On the other hand, debt mutual funds do have a fixed tenure of investment ranging from 1 day to 7 years (depending on the type of debt fund you are choosing). You can invest in debt mutual funds for as long as you want, and there is no penalty for early withdrawal.
Debt Fund Vs FD – Rate of return
The rate of return on a fixed deposit is usually fixed (ranging from 4 to 8%) and predetermined at the time of investment. In contrast, the rate of return on debt mutual funds is not fixed and varies based on the prevailing interest rates and market conditions. It can range from 4 to 9%.
Fixed deposits typically offer lower rates of return compared to debt mutual funds.
Debt Fund Vs FD – Risk level
The rate of return on fixed deposits is guaranteed and does not fluctuate with market conditions. On the other hand, debt mutual funds have the potential to offer higher returns than fixed deposits, but they come with a higher degree of risk as the returns on debt mutual funds depend on various factors such as interest rate movements, the credit rating of the underlying securities, and market volatility.
Debt Fund Vs FD – Liquidity
Debt mutual funds can be redeemed anytime. On the other hand, fixed deposits have a fixed lock-in period. In case of an emergency, some banks allow premature withdrawal of fixed deposits with a penalty. Overall, debt mutual funds offer better liquidity than fixed deposits.
Debt Fund Vs FD – Dividend benefits
Dividends in debt mutual funds can only be paid from the interest received on bonds or capital gains earned through trading in these bonds. It is important to note that even in equity funds, there is no guarantee of dividends. On the other hand, there is no dividend paid on fixed deposit investments.
FD Vs Debt Fund – Taxation
In terms of taxation, both are taxed by adding the returns to your income and then applying the Income Tax Slab rate. The only difference in taxation arises for holding periods greater than 3 years.
- Short-term capital gains (STCG): If you hold the debt funds for up to 3 years (36 months), the gains earned on the investment are known as STCG and the gains are taxed as per the income tax slab rates in which the investor falls under.
- Long-term capital gains (LTCG): If you hold the debt funds for more than 3 years (36 months), the gains earned on the investment are known as LTCG and these gains are also taxed according to the investor’s income tax slab in which their total income fall and there will be no indexation benefits.
- On the other hand, Interest earned on fixed deposits (FDs) is considered fully taxable. The amount of TDS deducted depends on the interest income earned. If the interest income exceeds Rs 40,000 (for senior citizens the limit is Rs 50,000), TDS will be deducted at a rate of 10%. If you do not have a PAN card, the bank can deduct 20% of TDS. On the other hand, if the interest earned on a fixed deposit is less than Rs 40,000, it is exempt from TDS. If you do not fall under the tax slab rate, you can submit forms 15G and 15H to avoid TDS.
Debt Fund Vs FD – Fluctuation in interest rate
- Changes in the demand and supply of credit determine interest rates. For example, if there is a higher demand for credit, interest rates will rise, whereas if there is a lower demand for credit, interest rates will decrease.
- Fixed deposits have a fixed interest rate, which means the rate remains constant throughout the investment period. On the other hand, debt mutual funds invest in bonds and securities, which are subject to fluctuations in interest rates. Therefore, the returns from debt mutual funds are subject to fluctuations due to changes in interest rates. However, the extent of fluctuations may vary depending on the fund’s investment strategy and the type of securities it invests in.
Best Debt Mutual Funds
|Debt mutual fund name||1-Year||NAV||Expense ratio||Exit Load||Min. Investment|
|Aditya Birla Sun Life Medium Term Direct Plan-Growth||21.99%||Rs.34.01||0.81%||2.0%||SIP ₹1000 &Lump Sum ₹1000|
|UTI Banking & PSU Debt Fund Direct-Growth||10.68%||Rs.18.58||0.24%||0%||SIP ₹500 &Lump Sum ₹5000|
|UTI Bond Fund Direct-Growth||11.88%||Rs.66.29||1.29%||0%||SIP ₹500 &Lump Sum ₹1000|
|ICICI Prudential Short Term Fund Direct Plan-Growth||6.4%||Rs.53.98||0.39%||0%||SIP ₹1000 &Lump Sum ₹5000|
|Nippon India Ultra Short Duration Fund Direct-Growth||5.77%||3,718.01||0.38%||0%||SIP ₹500 &Lump Sum ₹100|
|ICICI Prudential Debt Management Fund (FOF) Direct Plan-Growth||5.89%||Rs. 38.72||0.41%||0.25%||SIP ₹1000 &Lump Sum ₹5000|
|ICICI Prudential Savings Fund Direct Plan-Growth||5.75%||Rs. 459.86||0.4%||0%||SIP ₹100 &Lump Sum ₹100|
|ICICI Prudential Corporate Bond Fund Direct Plan-Growth||5.84%||Rs. 25.86||0.3%||0%||SIP ₹105 &Lump Sum ₹105|
|Nippon India Income Fund Direct-Growth||5.7%||Rs. 82.31||0.58%||0.25%||SIP ₹500 &Lump Sum ₹5000|
|ICICI Prudential Banking & PSU Debt Direct-Growth||5.73%||Rs. 28.29||0.38%||0%||SIP ₹1000 &Lump Sum ₹5000|
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Debt Fund Vs FD- Quick Summary
- Debt mutual funds invest in various debt securities and offer potentially higher returns but also come with risks such as interest risk, default risk, and inflation risk. Whereas fixed deposits offer a fixed rate of return regardless of market conditions but also come with risks such as inflation risk and liquidity risk.
- Debt mutual funds refer to a type of investment that pools money from many investors to purchase debt securities, such as government and corporate bonds. The goal is to make money by earning interest on the borrowed money while the securities are held.
- A fixed deposit (FD) is an investment product offered by banks or other financial institutions where you can invest your money for a certain time at a predetermined interest rate. The amount invested in FDs cannot be withdrawn until the maturity date unless there is a penalty involved.
- Debt mutual funds and fixed deposits are two different investment options with varying returns, risks, and liquidity.
- Taxation on debt mutual funds and fixed deposits are different. The rate of tax on debt mutual funds is determined by the investment period of the funds, while interest earned on fixed deposits is fully taxable.
- The interest rate of fixed deposits is determined by the changes in the demand and supply of credit.
- Some of the best debt mutual fund plans are Aditya Birla Sun Life Medium Term Direct Plan-Growth, UTI Banking & PSU Debt Fund Direct-Growth, and UTI Bond Fund Direct-Growth.
Debt Fund Vs FD- Frequently Asked Questions
1. What is the difference between Debt Mutual Fund and FD?
Debt mutual funds invest in debt securities, which means that the returns you earn from these investments will be based on the interest rates and repayment prospects of these debt obligations. FDs, by contrast, are a type of account that pays fixed rates of interest.
2. Which is better, FD or debt mutual fund?
If you are looking to earn a fixed rate of interest rates, then investing in a fixed deposit will be a great option, and if you are comfortable taking risks and want to earn better returns than FD, opting for a debt mutual fund will be appropriate.
3. Is it good to invest in debt mutual funds?
Debt mutual funds are a great way to invest your money, you can earn anywhere from 6 to 9%. It can be a good option for investors who want to earn stable returns with lower risk than equity investments.
4. Are debt mutual funds safe?
When you invest in a debt mutual fund, you are essentially lending money to the company or government entity that issued the underlying debt instrument. The risks associated with these funds are credit risk, interest rate risk, and liquidity risk.
5. Can debt funds give negative returns?
Debt funds are a great way to save money, but they may also give you negative returns. The returns from debt funds are impacted by various factors, such as changes in interest rates, credit risk, liquidity risk, and market volatility.
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