Fixed Deposits vs Debt Mutual Fund

If you are looking for a low-risk and non-volatile investment avenue with an investment horizon of 5 years with expected 8-9% yearly returns, then you have two options available to you: FDs and Debt Mutual Funds. However, choosing between the two can be tricky for the average investor.

But, with the current volatility in the Indian stock market and below-average returns in debt mutual funds, fixed deposits look more attractive than ever. People invest in debt mutual funds because they carry low-risk and provide decent returns. However, fixed deposits offer high safety of investment and provide good or even better returns if done through a credible FD provider such as Finserv MARKETS.

Fixed deposits available on Finserv MARKETS come with CRISIL FAAA rating, which means the highest standard of safety that you can get for your investments. Moreover, you can get returns as high as 8.70% on your fixed deposits.

Choosing Between FDs and Debt Funds

Whether fixed deposits or debt mutual funds work for you depends on the type of investor you are and your investment goals. While some investors may favour fixed deposits, others may find debt mutual funds as a more attractive investment option. You should also be aware of factors such as taxation, investment horizon, risk appetite and liquidity before choosing your ideal investment tool.

Below we will distinguish between the FDs and Debt Funds on various parameters and leave you to decide the best investment option for you.

  • Safety of investment

Fixed deposits have a credit rating system that indicates the safety of your investment. ‘FA’ rating means Adequate Safety, while an ‘FAA’ rating means high safety. An ‘FAAA’ rating is desired because it denotes the highest level of safety for your investment. Fixed deposits available on Finserv MARKETS come with the highest safety as they are given FAAA rating by CRISIL.

Debt mutual funds, on the other hand, don’t have any fund rating system to gauge the safety for investors. One has to go through a huge amount of analysis and assessment to determine the safety of a debt mutual fund and there are no guarantees on the investment from any authority. Given the current instability in the financial market, you should only invest in debt mutual funds if you have a high-risk appetite.

  • Premature withdrawals

Financial experts advise against premature withdrawal of fixed deposits because you won’t earn the original rate of interest and there could be penalties charged for early withdrawals. Only a few financial institutions allow partial withdrawals of FDs; if you want to withdraw from a fixed deposit, it has to be broken. Penalties on premature withdrawals can range from 0-15% of the invested amount.

In debt mutual funds, money can be withdrawn anytime without inviting a penalty if the withdrawal takes after 12 months of initiating the investment. If an investor wants to continue with the debt mutual fund, the rate of return remains unchanged.

However, the disadvantage of lower returns and penalties for early withdrawal of FDs can be easily avoided by taking a loan against the FD to meet immediate financial requirements.

  • Rate of returns

When you invest in a fixed deposit, you already know the rate of return you will get on your investment. A fixed-rate of return and an exact sum of amount in a specified period allows you to plan well and meet your future financial goals. You can expect guaranteed and fixed returns no matter how the market performs. Currently, FDs generate yearly returns from 8-9% which is higher than what most debt mutual funds are able to generate in the current market scenario.

Debt mutual funds don’t provide a specified rate of return on investment – not even within a range. These funds are subject to the vagaries of the financial market, which makes them highly volatile and risky.

  • Tax benefits

Returns on investment on FDs are taxed based on your taxable income. Interests earned on FDs are considered as income and if your income is more than Rs. 5 lakh per annum, it will be taxed at the rate of 10%. If you earn more than Rs. 10 lakh annually, you will be taxed at the rate of 30%. However, you can avoid paying taxes by investing in tax-saving FDs that have a minimum lock-in period of 5 years.

While returns from investments in stocks and equity mutual funds through SIPs are subject to long-term capital gain (LTCG) tax, fixed deposits interest income up to Rs. 40,000 is exempt from tax deducted at source (TDS). Therefore, if your income is 5.4 lakh with Rs. 40,000 as FD interest income, you are not required to pay any taxes even if your income is above the exempt limit.

Debt mutual funds are also taxed the same as fixed deposits during the first year. It is taxed at a lesser rate than FDs between the first and third year. After the third year, debt mutual funds are tax-free while FDs are tax-free after five years.

How to Choose the Right FD Scheme?

You can choose the right fixed deposit depending upon your investment goal, amount and tenure. The following factors should be kept in mind before selecting the right FD scheme:

  • Rate of interest

  • CRISIL and ICRA rating or credibility of the FD provider

  • Tenure

  • How often interest pay-out is made

  • Rate of penalty for premature withdrawals

Features of FDs on Finserv MARKETS

  • Fixed deposits available on Finserv MARKETS offer one of the highest rate of returns in the market: Up to 8.70%

  • Senior citizens are eligible for additional 0.35% returns on investment.

  • Easier to invest with just Rs. 25,000 to begin with.

  • High safety and stability ratings in the market: CRISIL’s FAAA/Stable rating and ICRA’s MAAA (stable) rating.

  • You can also make multiple FD deposits on Finserv MARKETS with a single payment.

  • Laddering option to invest in multiple FDs with varying maturity dates.

Eligibility Criteria for FDs

To open a fixed deposit account on Finserv MARKETS, you should be a resident Indian citizen and invest a minimum amount of Rs. 25,000.

The following are eligible for investing in an FD:

  • Individuals

  • Hindu undivided family (HUF)

  • Sole proprietorship

  • Partnership firms

  • Companies

  • Clubs, associations and societies

  • Family trusts

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