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calenderMar 26, 2024

FDs or Debt Funds: Why both should belong in your portfolio

Debt Fund vs. Fixed Deposit: both offer stable returns but work quite differently.

FDs provide guaranteed returns over a fixed period, while Debt Funds invest in bonds and money market instruments for potentially higher gains. However, Debt Funds carry more risk since the underlying assets can fluctuate in value.

So, which is the superior choice for your financial goals?

Comparative analysis: Debt Fund vs. Fixed Deposit

When it comes to the debate of Debt Mutual Funds vs. Fixed Deposits, no two investors are alike. So, who emerges victorious in the battle of Debt Fund vs. Fixed Deposit? Let's delve deeper.

Returns

The returns on fixed-deposit accounts are guaranteed. Throughout the tenure of an FD, the interest is compounded at a fixed rate. However, debt funds, being market-linked products, do not offer guaranteed returns. The returns on debt funds are subject to changes in the prices of underlying debt instruments, which may fluctuate due to changes in interest rates and other economic factors. Debt funds have the potential to generate higher returns than FDs but also come with higher risks.

Risks

FDs offer stability and low risk as they are less affected by market changes. Moreover, your money in a bank is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, which covers deposits up to Rs. 5 lakh, including both the principal and interest amount. However, there's a risk of reinvestment associated with FDs due to changes in economic interest rates. On the other hand, Debt Funds don't guarantee protection of your initial investment and are influenced by market fluctuations. There are various types of Debt Funds, each with different levels of risk and potential returns. However, all Debt Funds face three main risks: credit risk, interest rate risk, and liquidity risk. Investors can assess the risk level of a fund by checking its risk-o-meter.

Liquidity

In terms of liquidity, both Debt Funds and FDs are easily accessible. Open-ended Debt Funds don't have a lock-in period, meaning you can withdraw your money whenever you need it. You can redeem your units and receive payment within two days, though there might be exit loads to consider. In the case of fixed deposits, you can withdraw before maturity; however, you may have to pay a penalty.

Flexibility

Debt Funds give you flexibility in investing, offering choices for one-time payments or regular investments through SIPs. Depending on your financial strategy, they allow for either a large lump-sum investment or consistent, disciplined investing. Fixed Deposits (FDs), on the other hand, usually need a lump-sum commitment.

Charges

Fund houses charge a fee for managing Debt Funds. On the other hand, since there are no costs associated with opening or maintaining an FD account, banks and other financial institutions offer FDs as a cost-effective investment option for many.

Taxation

Both the returns from Fixed Deposits (FDs) and the gains from Debt Funds contribute to your overall income and are thus subject to taxation according to the applicable income tax slabs. This means that the interest earned from FDs and the profits obtained from Debt Funds are treated as part of your taxable income for the relevant financial year.

In conclusion, there isn't a single winner. You can choose the option that best fits your investment horizon, financial goals, and risk tolerance. Additionally, you can spread out your fixed income investments among various options such as FDs, RDs, Debt Funds, Small Savings Schemes, etc., to diversify your portfolio.

Also Read: Fixed Deposit (FD) vs Mutual Funds (MF)

FAQs


Q. Are Debt Funds safer compared to FDs?

Debt Funds are generally considered to have a low to moderate risk profile. They offer diversification across a range of debt instruments and are managed by asset management companies (AMCs). However, they do not guarantee returns and are subject to market volatility.

Q. Should I move all my investments from FDs to Debt Funds?

Shifting all your investments from FDs to Debt Funds depends on your investment horizon, financial goals, and risk tolerance. It's advisable to maintain a diversified investment portfolio across different products. Before making any investment decisions, please consult with your financial advisor.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision. Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.