For generations in post-Independent India, common men would walk into a bank to park their extra cash in Fixed Deposits (FDs) without pausing to think for a moment. But for the modern investor, options are increasing and debt funds have become a highly feasible alternative that many experts are suggesting.
While, through an FD, an investor puts a certain sum of money in the hands of an institution for a specified period in return of a specific rate of interest, a debt fund is a more dynamic concept, through which, an investor buys units of mutual fund that invests in various debt instruments. There are a few pros and cons of both instruments across a few dimensions. Let’s have a look.
Which is better, debt fund or FD
While there is no assertive answer to the question “Which is better, debt fund or FD?”, debt funds seem to score higher on a few factors such as liquidity and taxation. Only one category of FDs offer tax deductibility, but those typically have a long lock-in period of 5 years. Also, in most cases debt funds generate better returns than fixed deposits either in banks or in corporates.
Debt funds score on liquidity
One advantage of a debt fund is liquidity. While an FD is for a specific term, a debt fund units can be sold at any point in time. Moreover, since a debt fund invests in different debt instruments of multiple institutions, it serves the cause of diversification better. Debt funds can invest in debt securities of governments, banks and companies both in the private and public sector.
Debt funds score higher on returns
According to reports, the 1-year return of a few prominent debt funds in India are as follows: Aditya Birla Sun Life Medium Term Fund: 11.19%; Edelweiss Crisil IBX 50:50 Gilt Plus SDL April 2037 Index Fund: 11.06%; UTI Crisil SDL Maturity April 2023 Index Fund: 10.82%; HDFC Nifty G-Sec Jun 2036 Index Fund: 10.81%; Nippon India Nifty G-Sec Jun 20236 Maturity Index Fund: 10.81%. On the other hand, no bank or corporate pays interest at this rate on terms of 1 year or any other.
FDs less tax efficient than debt funds
The interest income from FDs is taxed on the basis of the tax slab of the individual. Those in the higher tax brackets can find this detrimental. If debt funds are sold later than 3 years after they are bought, Long Term Capital Gains (LTCG) at 20% is applicable.
(Disclaimer: This article is only meant to provide information. News9live.com does not recommend buying or selling shares or subscriptions of any IPO and Mutual Funds.)
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