Fixed deposits (FD) guarantee fixed returns with predetermined interest rates for a specified tenor, making them a conventional investment choice. Renowned for their capital preservation attributes, FDs are often perceived as a safe choice for risk-averse investors.
On the contrary, debt mutual funds introduce an element of dynamism by investing in a diversified portfolio of debt instruments such as bonds and government securities. Managed by seasoned fund managers, these mutual funds navigate the intricacies of the market, responding to interest rate fluctuations and credit risk assessments to optimise returns.
The choice between debt mutual funds and FDs depends on various factors. These include your financial goals, risk tolerance, liquidity needs, and investment horizon. Let's compare the two:
Particulars |
Debt Mutual Funds |
Fixed Deposits |
Returns |
Market-linked returns |
Assured returns; fixed interest rate |
Liquidity |
Units can be redeemed on any business day |
Premature withdrawal is permitted but subject to penalty |
Dividend Option |
Yes |
No |
Risk |
Vulnerable to market volatility |
Deposits are insured for up to ₹5 Lakhs by DICGC |
Tax Implications |
Capital gains are taxable |
Interest earned is taxable as per the individual tax slab |
Tax Benefits |
N/A |
Tax-saving FDs offer exemptions under Section 80C |
Fixed Deposit and Other Investment Comparisons |
||
|
FDs are a traditional investment offered by banks with a fixed tenor and a predetermined interest rate. Debt mutual funds, on the other hand, invest in a mix of fixed-income securities and offer more flexibility in terms of tenor and liquidity.
Returns depend on various factors, including market conditions. Debt mutual funds have the potential for higher returns, especially over the long term, due to the market-linked nature of their investments. However, FDs offer fixed and guaranteed returns.
Tax-saver FDs offered by banks are eligible for deductions of up to ₹1.50 Lakhs per financial year u/s 80C of the Income Tax Act, 1961.
FDs usually have a fixed tenor, and breaking them prematurely may attract penalties. Meanwhile, debt mutual funds offer more liquidity, allowing investors to redeem units partially or completely based on their needs.
FDs may have penalties for premature withdrawals. Debt mutual funds generally allow investors to redeem units at any time, but short-term redemptions may attract exit loads.
Dividends from debt mutual funds are now taxed in the hands of the investor. Previously, the Dividend Distribution Tax (DDT) was applicable, but it was abolished in the Union Budget 2020.
Debt mutual funds have the potential for higher returns over the long term, but past performance isn't guaranteed. Whereas, FDs offer fixed, predictable returns.
FDs usually lock your money for a fixed term. Most debt funds are open-ended, allowing faster redemption (except close-ended funds).