Debt Funds vs Fixed Deposits

Difference Between Debt Fund and FD

Bank FDs are the conventional and traditional investment alternative for most Indian households. According to a recent report of RBI, nearly 50% of household financial assets in India are in Fixed Deposits. Debt mutual funds as not as popular as equity funds but have grown popular over the last few years. Nevertheless, in terms of household financial assets investments in Debt Mutual Funds is still a small fraction of Fixed Deposits. In this article, we will analyze and talk in detail about the main difference between FD and Debt Mutual funds so that investors can make an informed decision. 

Know More About Debt Funds vs FD

 Returns:

Fixed deposits pay compound interest at a fixed rate over the FD term. This interest usually compounds quarterly. FD interest rates have been going down for several years now. Currently 2-3 year FD interest rates for major private and public sector banks range from 4.5% to 5%. Unlike FDs, debt mutual funds do not give assured returns as they are market-linked. Data suggests that debts funds have often outperformed FDs of similar tenures. Hence, Debt funds score over FDs when compared on the basis of returns. 

Transparency:

If we compare FDs and Debt Funds, though FDs are considered to be safe alternatives, bank default can not be ruled out as the possibility of risk. Average investors have very little information on loans offered by the banks, bad debts written off, NPAs of banks among other information. Debt funds on the other side are very transparent as the plan portfolio is disclosed monthly by the AMCs in the factsheets with complete information and details like credit rating, instrument name, and exposure of instruments in the plan. 

Watch This Video to Know More Details -  Debt Funds vs FD

Risk:

Fixed deposits pay back the principal amount along with accrued interest on maturity. If we compare them with debt funds on the basis of risk, the banks provide assurance of capital safety and as such, FDs are thought to be free of any risk. Nevertheless, if the net worth of the banks goes negative due to high NPAs then the bank may default on the repayment of FDs. Though bank defaults are rare, it is still within the possibility. 

In these cases, investors’ deposits both interest accrued and principal are guaranteed up to Rs. 5 lacs. If your investments are beyond that, you may not get compensated in any way. 

Whereas, Debt Funds invest in money market and debt instruments like CoD, commercial papers, government bonds, corporate bonds among others. Debt funds offer no assurance of capital safety and are subject to market risk. There are 2 risks in a debt fund namely, credit risk and interest rate risk. Credit risk relies on the credit ratings of the securities. The interest rate risk of a debt mutual fund relies on the duration profiles of the fund. For instance, a debt fund that invests predominantly in money market instruments has less interest rate risk, while gilt funds of long-maturity tenure have a higher risk.

Investors should understand and evaluate the risk and invest accordingly. This is the difference if you compare FDs and debts fund on the basis of risk.

Liquidity:

If we talk about FDs, they have a lock-in period and are not highly liquid. Some banks also charge penalties and fees for premature FD withdrawal. Whereas in Debt Funds, there is no lock-in period and you can redeem the units whenever you want and the amount will get credited to your bank account in 2 to 3 business days. This redemption within the exit load period will attract some exit load which is charged on the amount being redeemed. After the exit load period is over, investors can redeem units without any type of charge. 

Taxation:

Interest on Fixed Deposits is taxed during the tenure of the investment and on maturity. The FD interest is added annually to the income of the investors and taxed according to the applicable tax slab. Debt funds enjoy tax advantages over FDs especially in the case of investors with high tax brackets. STCG is debt funds are taxed like FDs and LTCG are taxed at 20% only after allowing benefits of indexation. Hence LTCG is a major advantage in debt mutual funds in debt funds.

Also Read : SBI FD Interest Rates in 2023

Bank FD vs Debt Funds - Difference 

THE CRUX 

We discussed and got an understanding of the difference between debt mutual funds vs FDs on several bases and parameters. If capital safety and assured average return are of utmost importance then FD is the investment alternative for you.

Nevertheless, investors can get potentially superior and higher risk-adjusted returns by investing a portion of their fixed-income assets in debt funds and enjoy the benefits of taxation. 

For detailed guidance and expert advice, you can get in touch with our experts at ZFunds! We assure to make investments ‘Sahi aur asaan’ and build the best possible investment portfolio for you.

Frequently Asked Question - Bank FD vs Debt Mutual Fund

Q. What is bank fixed deposit Calculator ?

A. Bank FD calculator is a tool that calculates how much one shall get on investing in a FD at the time of maturity.

Q. What are Debt Mutual Funds ?

A. A debt fund is a Mutual Fund scheme that invests in fixed income instruments, such as Corporate, Government Bonds and corporate debt securities.

Also Read : 

IndusInd Bank FD Interest Rates

Kotak Bank FD Interest Rates

Yes Bank FD Interest Rates

Mahindra Finance FD Interest Rates