Generally, people consider that investing in Fixed Deposit is the most convenient option and safe and offers a fixed rate of returns. Fixed Deposit is an easy investment and the returns of FD being less taxable as compared to debt fund, as in the case of shorter duration.
For a longer duration, debt mutual funds offer a good return. So, before making a final decision to invest in a debt fund or fixed deposit we should go through the detailed comparison of those investments. Fixed deposits are now an alternative to mutual funds as short-term yields sink and the stamp duties bite into the debt fund returns. Most of the financial planners feel that fixed deposits are only better for the time horizon for more than 1 year.
Successive rate cuts and various liquidity easing measures by the Reserve Bank of India have depressed yields in the short-term bond markets. This created an advantage for investors in bank FDs. The return that an investor will get is the yield minus the fund’s expense ratio. Certain other factors such as interest rate risk and the credit will also affect the debt fund returns apart from yields. If the holding period of the debt fund is less than 3 years, they will not enjoy any tax advantage. As the same as bank deposits capital gains in-debt funds are also taxed at slab rate. The tax deducted at source will be applicable on bank FD interest. But, it does not apply to in-debt funds, it is one of its minor advantages. Fixed deposits make sense for time horizons of less than or equal to one year. But if the time horizon is longer it is better to choose an ultra – short term fund or short-term funds which will offer higher returns to them. The best advantage of debt funds is its liquidity power. It is possible to redeem debt funds at any time of a business day, but it will charge an interest rate penalty of 1% by breaking a fixed deposit.
Those debt funds which are held for more than 3 years are taxed at with indexation on capital gains. By comparing fixed deposits, this works out to be a lower rate for those taxpayers in the highest slab rate. It will only be a short-term horizon to choose debt funds which have very low expense ratio to minimize the returns for the investors, it is important to choose a fund which provides higher credit quality to avoid any credit events.
So, it is necessary to examine carefully by the investors about their requirements, liquidity, and tax before choosing between the two alternatives.
