Should you invest in debt mutual funds or FDs?

Some of the important elements that might help you choose between debt mutual funds and fixed deposits are capital safety, rate of return, lock-in time, and taxation.

For many of us, safety comes first and returns come second when it comes to investing. After all, no one wants to risk their hard-earned money on a game of chance. As a result, fixed deposits and gold became our preferred investment vehicles. We forget that fixed deposits may not be the best financial option in this mania for safe investments.

Debt mutual funds, on the other hand, are a good option for investors who want capital protection and inflation-beating returns. Debt mutual funds are a type of mutual fund that invests in fixed-income securities issued by businesses and governments.

Let’s look at the differences between debt mutual funds and fixed deposits so you can compare the two investing options and make an informed decision.

Rate of return/interest rate:

Fixed deposit returns are guaranteed and now range between 7% and 7.5 percent. While interest rates remain constant during the set term, they may fluctuate over time. As a result, interest rates may fluctuate when you choose to reinvest the fixed deposit’s maturity amount. With interest rates on the down, banks may reduce deposit interest rates in the future.

Returns on debt mutual funds, on the other hand, are not guaranteed and are related to the debt market. Because fund managers make investment decisions based on current debt market circumstances and select papers based on credit ratings and internal research, debt mutual funds have the potential to generate higher returns than fixed deposits. If one stays invested in a debt mutual fund throughout the duration of the fund while leaving all other factors constant, the predicted returns are usually Yield to Maturity minus expense ratio. Furthermore, debt funds benefit from lower interest rates since the price of a mutual fund unit, or net asset value, rises when interest rates fall.

Debt mutual funds have a larger chance of generating higher real returns. The real returns on an investment option are those that exceed inflation. For example, if the average rate of inflation was 5% that year and the interest rate on fixed deposits was 7%, the real rate of return is 2%. A higher real return aids in achieving financial objectives.

Capital protection:

Bank fixed deposits outperform debt mutual funds in terms of capital preservation. Fund houses, on the other hand, cannot guarantee capital safety. Capital protection differs from the issuer of fixed deposits in the case of FDs. Fixed deposits with non-banking financial companies yield better yields, but they also carry a higher risk than bank deposits. Though the danger of capital erosion is low in debt funds due to the portfolio’s well-researched securities and diversity.


Fixed deposits have a maturity time, and if you redeem them before the maturity date, you will be charged a penalty. You can, however, redeem your debt monies at any moment. However, if you redeem inside a certain time window, some debt funds may impose exit loads. As a result, debt funds are more liquid than fixed-income investments.


Debt funds have a superior tax structure than fixed deposits since they have indexation benefits. Short-term capital gains and long-term capital gains are the two types of taxes that apply to debt mutual funds. If the units are redeemed before three years, short-term capital gains apply, and the gains are taxed according to the income bracket. Long-term capital gains taxation of 20% with indexation is available if you invest for more than three years. Indexation is the process of accounting for inflation increases. In this situation, gains are only taxed if the rate of return exceeds the rate of inflation. In the case of an FD, however, the entire gain is taxed according to the investor’s tax rate.


 If you’re searching for a somewhat stable investment option with inflation-beating returns, debt mutual funds are a decent choice. Debt mutual funds can also provide tax-efficient returns for investors in higher tax bands.

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