Are Debt Funds Better Than Fixed Deposits?

Fixed deposits are probably the most popular investment option among Indians. They are easy to manage, have no risks, and offer satisfactory returns too. However, as RBI is slashing interest rates (it cut the interest rate by 150 BPS in 2015), on top of which public sector banks are also slashing the rates further, it’s possible that debt funds can offer better returns.

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Returns

For investments with a term of 3 years or more, debt funds will offer higher returns that fixed deposits or even non-convertible debentures. In fact, debt funds tend to give better returns the longer they are invested for. While a standard fixed deposit account for a 5-year term will provide as much as 7.9% return, long term gilt funds, income funds, etc. can offer 10% to 12% return.

Liquidity

Debt funds have high liquidity as you have the option of exit available at all times. On the other hand, in fixed deposits, you don’t have this provision and have to pay a penalty for withdrawing prematurely.

Tax Benefits

Debt Funds also offer excellent benefits for tax deductions. As the capital gains from the sale, units are calculated on the basis of the inflation index. So, the purchase costs are adjusted for inflation, which is fair. Moreover, the tax applicable on returns is set to flat 20% unlike traditional investments such as fixed deposits in which the tax is calculated on the basis of appropriate tax slab (10%, 20%, or 30%).

For those who have low-risk tolerance fixed deposits may be a good option. However, for long-term investments, debt fund is a clear winner.