Finance

Reasons to choose debt fund over fixed deposits

A slump in the interest rates has left Indian investors doubting the credibility of their favorite investment avenue, bank fixed deposits. Bank FDs have been one of the most trusted and one of the most sought after investment options for Indians. But after witnessing an all-time low in the fixed interest rates, people have started to lose interest in FDs. These investors are now exploring options like debt mutual funds which aim to offer better returns than fixed deposits without taking any added risks.

Moving on from traditional FDs to Debt mutual funds

Indian investors have been utilizing FDs as an investment option for every single extra penny that they received. That’s because FDs were an ideal investment option for earning returns while protecting one’s investment sum. But ever since mutual funds were introduced, the perception of Indian investors has changed as they are now having an opportunity to earn returns like they never did with the conventional FDs. FDs have lost their charm as a long-term investment because of their inability to generate commendable returns in the long run. On the other hand, mutual funds offer diversification and high liquidity allowing investors to redeem their investments at any given time.

Why should one consider debt funds over fixed deposits?

People who are shifting from FDs to mutual funds generally do not want to expose their finances to the equity market’s volatile nature. For such investors, investing in debt mutual funds makes more sense because they carry risks similar to bank FDs.

The below table shows some of the major differences between fixed deposits and debt mutual funds:

Parameters Debt mutual funds Bank Fixed Deposits
Returns Debt mutual funds offer an average of 7%-9% returns Bank FDs offer 5%-7% returns
Dividends Debt mutual funds offer dividends to investors whenever the scheme makes profit Bank FDs do not have dividend option
Risk Low to moderate risk profile Low risk profile
Redemption option Investors can easily withdraw their debt fund investments without any exit load If you redeem your FD investments prematurely, you may be penalized
Investment option Investors can start a SIP in a debt mutual fund scheme of their choice SIP option is not available in bank FDs and investors can only make a onetime lumpsum investment
Management fees Debt funds charge expense ratio to investors There  is no expense ratio or any other management fee levied on fixed deposits

All investors are well aware that inflation can affect one’s long-term capital gains. In the case of bank fixed deposits, if they are offering  5% returns and the rate of inflation is 4%, the adjusted returns would be only 1%. However, by investing in debt funds investors may be able to fetch much more returns than what bank FDs are offering. Debt funds can help investors overcome in the long run by offering a commendable corpus in the long run.

Bank fixed deposits offer fixed returns over the investment horizon which can be 3 years, 5 years, or even more. The returns offered by debt mutual funds somewhat depend on the fluctuations in the interest rate. The investment objective of debt funds is to offer stable returns with minimum investment risk. The returns which debt funds generate may not be higher than equity mutual funds but they are mostly better than that offered by bank FDs. There are various debt schemes to choose from and depending on one’s investment horizon and investment goals, they can accordingly invest. Investors can directly buy debt funds from the AMC or they can buy from an aggregator as well.

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