Fixed Deposit Vs Debt Funds : Which is Better

The rivalry of fixed deposit and debt funds is as old as these two itself. The fixed deposit has been the prime choice of people in general who are looking to grow their money with least or no risk. It’s the investment of generations where people have apply fixed deposit account for their children and grand-children to provide financial security to their future. Although with the passage of time debt funds have grown in popularity and has also been able to convince many that debt funds are a better option than fixed deposit.

To really understand the better option between the two we need to do some in-depth unbiased analysis, which is exactly why this article is written. Let’s discuss the key aspects involved in these two types of investment like return, risk, liquidity, tax.

1. Return: This is one of the most crucial element in order to decide the best investment. The usual range of return in case of debt funds is 7%-8.2% few of debt funds do carry a rate of more than 8.5% as well going up to 9-10% but with the increase in return, their risk factor also increases and the tenure for these funds are less.

Now when it comes to fixed deposit return offered by bank ranges from 5.5%-7.5%, but the return from NBFCs ranges from 8%-9.5%.

Another key factor in return is, in case of fixed deposits nowadays most institutions are providing the facility of cumulative return, but in case of debt funds such facility is not there.

2. Risk: Fixed deposits are regulated through RBI guidelines whether it is bank or NBFCs. Debt funds, on the other hand, are regulated and monitored closely by SEBI. The risk profile of debt funds are strongly regulated and any discrepancies are attended with serious actions. Another aspect with funds is the risk related to the interest rate as funds will lose value as the interest rate rises and vice versa. Long term fixed deposits also have an opportunity cost associated with it.

There have been fewer instances when few co-operatives and banks have defaulted on fixed deposits as compared to the number of debt funds which have lost their value completely. In case of banks and NBFCs assured return at maturity is provided.

3. Liquidity: Open-ended funds provide quick liquidity to those investors who are looking for it, whereas in case of fixed deposits one has to choose a tenure beforehand. Though most institutions provide the facility of breaking your fixed deposits before maturity, in such a case one also incur some heavy penalty or charges.

4. Tax: TDS is deducted in case of FD interest exceeding Rs. 10,000. The interest income is considered as part of total income and is taxable as per slab rate. However, the interest or profit from debt funds are covered under capital gain tax rate and after 2 years it gets the benefit of indexation as well.

The above difference shows that on tax front debt funds have an advantage over fixed deposits. However, cumulative interest calculation in case of fixed deposit makes it an attractive option as compared to return on debt funds.