Home Investment Debt Mutual Funds Vs Fixed Deposits: Where Should I Invest?

Debt Mutual Funds Vs Fixed Deposits: Where Should I Invest?

6 min read

As per Money Control data, bank fixed deposits witnessed a total investment of Rs 32 crores between April 2021 and May 2021. During the same period in the year 2020, bank FDs had witnessed investments worth Rs 1.2 trillion.

What could possibly be the reason behind this?

Interest rates in India are witnessing an all-time low. The current interest rate on Fixed Deposits (FDs) stands anywhere between 4% to 5%. In such a scenario, investors are looking for other debt related investment options and are finding debt mutual funds a sensible alternative for FDs. As per RBI, The Y-O-Y growth rate of bank deposits in India fell by 9.7% for May 2021 as opposed to the previous year’s growth rate which stood at 10%-11%. And for fixed deposits, the Y-O-Y growth rate fell from 9.5% in 2021 April to 8.9% in May.

So, for investors which is a better investment option – Fixed Deposits or Debt Mutual Funds?

When you invest your money in a fixed deposit, at the end of your investment duration you are guaranteed a fixed income which is a combination of your investment sum and the interest that has compounded over the years. This is why FDs have been the primary investment choice for your parents as well as our grandparents.

This is where debt mutual funds differ from FDs. Debt mutual funds are open ended mutual fund schemes that invest in fixed income securities and money market instruments like government back securities, corporate bonds, treasury bills, commercial papers, etc. Even though debt funds invest in debt related instruments, they do not offer guaranteed returns. Do understand that any mutual fund investment is subject to market risk and returns are never guaranteed.

Still, there are a few reasons why debt mutual funds are better than fixed deposits –

Investors who are risk averse can consider debt mutual funds as they carry relatively low risk and are almost similar to FDs when it comes to investment risk. The investment objective of most debt mutual funds is to protect the investor’s capital whilst generating stable income for them. Currently, market regulator SEBI (Securities and Exchange Board of India) has enlisted 16 different product categories under the debt scheme category. With so many options, we can easily say that there are enough debt funds that can easily cater to the investment needs of almost every type of investor.

Here is a direct comparison between Debt Mutual Funds and Fixed Deposits –

Parameter Debt Mutual Fund Fixed Deposit
Interest rate 7% to 9% 4% to 5%
Dividend distribution Available No dividends offered
Risks Low to moderate risk Low investment risk
Liquidity Very high Low liquidity
Investment mode SIP and lumpsum investment options are available Only lumpsum investment option available
Returns Subject to how debt markets move Subject to the pre-defined interest rate offered by the bank at the time of investment
Withdrawal/Unit redemption Investors can redeem some of their debt fund units or withdraw the entire investment sum at any given time Upon withdrawal from Fixed Deposits before the maturity period a penalty is levied

Investors who do not have a large surplus to start their investment journey can opt for the option of the Systematic Investment Plan. SIP is a simple and effective way to save and invest a fixed sum at regular intervals in a mutual fund scheme. Investors can even use the online SIP calculator to compute the total returns earned through SIP investments in debt mutual funds.

Debt funds have several advantages over Fixed Deposits and hence investors, after talking to their financial advisor can consider investing in a scheme that fits their income and investment needs.

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