Debt Fund Vs FD

Debt Fund Vs FD

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

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. 

FD Meaning

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 feesThere 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.