Debt funds vs Bank FDs

Introduction

Fixed deposits and debt

mutual funds are among
the most popular assets
for risk-free investors.

In spite of rising interest rates, fixed deposits have proven to be a

reliable option for Indian retail investors, whereas debt funds are mutual
funds that invest in debt securities.

A debt fund is a Mutual Fund scheme that

invests in fixed income instruments, such as
What are Corporate and Government Bonds,
corporate debt securities, and money market
Debt Funds? instruments etc. that offer capital
appreciation. Debt funds are also referred to
as Fixed Income Funds or Bond Funds.

A fixed deposit, also known as an FD, is an

investment instrument offered by banks, as well
as non-banking financial companies (NBFC) to What are
their customers to help them save money. At
the end of the tenure, you receive the lump Bank FD's?
sum, along with an interest, which is a good
money-saving plan.

Banking post - 179 December 5, 2022

 Debt funds vs Bank FDs
Debt funds invest in different types of bonds whose prices rise and fall depending on
interest rates in the economy. If a debt mutual fund purchases a bond and its price rises due
to a fall in the interest rates, it would make additional money over and above the interest
income.

Comparison

When you invest in an FD, the financial institution guarantees to return the invested sum at
the end of the tenure. The bank may use this money to lend to other borrowers and
charges them an interest for the same. A portion of this interest is passed on to you.

Debt funds outperform FDs. They offer better benefits for investors in higher tax slabs
while offering marginally higher returns with comparable risk levels. Therefore, it is prudent
to make investments in worthy avenues as per your suitability to generate better risk-
adjusted returns.

In this post, we discussed the differences between debt mutual funds vs fixed deposits on
several parameters. If capital safety and assured return is of paramount importance then FD
is the investment option for you. However, you can get potentially superior risk adjusted
returns by investing a portion of your fixed income assets in debt mutual funds and can also
enjoy taxation benefits in debt funds and that is the major advantage of debt mutual funds
if Debt Fund vs FD is compared.

Banking post - 179 December 5, 2022