Why are Debt funds a better option than fixed deposits?

Fixed deposits in the bank have long been a sought out option for long term investment. However, Debt funds are fast becoming an alternative option to choose as a debt instrument for investment. So, what is a debt fund? It is a mutual fund wherein the funds are invested in various fixed income investments like corporate bonds, government bonds, money market instruments etc. Investing in these longer term investments shields the investment from vagaries of the market generally associated with the equity fund investments.

Let us now look at the various reasons why debt funds can be considered as a good option in lieu of a fixed deposit.

• Safety: The main rationale for making investments in fixed deposits is the presumption of they being more safe when compared to any mutual fund investment. However debt funds provide a solution for this challenge with the funds being invested in longer term investment instruments like bonds and treasury bills. Although there is still an element of risk when compared to a fixed deposit, the other benefits that a debt fund offers outweigh this comparable risk. Let us look at these other benefits which provide the edge.


• Taxation: Saving on the taxation is one of the drivers behind most of the investment savings that are made. The returns that are derived from the bank deposits are considered to be part of the normal income and hence fall under the tax bracket to an extent of 30 percent tax deduction. However for a debt fund of more than 36 months, the returns accrued are considered to a gain on capital interest and hence has 20 % taxation on the returns. This is a straight saving of 10 percent tax for you.


• Higher liquidity: Fixed deposits offer less liquidity and are locked in for a longer period of time. The terms of claiming the amount are also quite rigid with any withdrawal before the maturity period, attracting very less return on the investment. The debt funds on the other hand provide the feasibility of withdrawing funds at any given point of time and to any extent of amount. There are certain charges levied for an early withdrawal even for debt funds but are more flexible in comparison to the ones levied on fixed deposits.


• Returns: The extent of returns on the investment made is one of the main factors influencing the choice of the returns. If the main criteria for you, is to gain higher returns on the funds invested, Debt funds are a better option than fixed deposits made in the banks. The highest interest rates on fixed deposits are around 5-6 % whereas most of the debt funds offers rate of interest around nearly 8-10 %. The rate of returns are not only higher in debt funds, most of the companies also offer security against a certain minimum rate of return.

These benefits offered by debt funds when compared to fixed deposits make them an advised option by most of the financial advisors.