HomeBusinessWhere to Invest: Debt Funds or Fixed Deposits

Where to Invest: Debt Funds or Fixed Deposits

Making a regret-free investment decision can be quite a task. The staggering number of options in today’s market can leave you with a vague mindset. While some suggest risk-free Fixed Deposits, others would advise you to invest in a more rewarding Mutual Fund. This can be an overwhelming choice to make and is not worth the risk of getting minimal benefits. Let us take a look at these two investment choices.

Debt Funds

Debt funds consist of investment pools like Mutual Funds, gilt funds, short-term plans, monthly income plans, and liquid funds. Short-term, mid-term, and long-term plans are also a vital part of these funds. Debt funds give you a steady and low income but involve fewer stress factors. With a debt fund, your deposit is preserved and the return is certain.

Fixed Deposits

A Fixed Deposit is an investment you make by depositing a lump sum in a bank or NBFC for a particular period, with a predetermined rate of interest. The interest rates provided by these institutions are generally higher for an FD than for a savings account. With the availability of the online FD calculator, it makes it easy for an applicant to calculate the returns with the determined rate of interest and tenure on their investment.

The Comparison

  • For an FD, the rate of interest is set at the very beginning, and fluctuations in the market will not affect the returns. Debt funds will not necessarily have the same amount of interest throughout. You can avoid this volatility by analyzing and selecting an entity with lower risks.
  • The interest earned on a Fixed Deposit is chargeable for taxes. In the long run, taxes levied on debt funds are almost nil. The first year, however, has more or less the same amount of tax deduction for both investments. While FDs give you the benefit of interest, debt funds offer capital appreciation.
  • Debt funds offer a better liquidity option. You can withdraw your investment any time you want to and the amount is transferred to your account within 3-4 working days. Removing money from FDs before the maturity period can be unfavorable for the investor. You will have to pay the penalty and might also receive a lower rate of interest on your deposit.
  • An investor must pay taxes regularly for a Fixed Deposit. This means you will have to keep a track of all your records and file taxes accordingly. For a debt fund, the paperwork is minimal. You pay a capital gains tax when withdrawing the deposit at the end of the term, which would be a period of five years or so.

The Verdict

While Fixed Deposits seem like a safer option involving minimal risk, debt funds are a better and more rewarding alternative. Investing in a debt fund gives you the benefits of higher returns, more liquidity, and lower tax deductions. Debt funds are the right choice for those willing to take a little risk and make a long-term investment.

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