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.

Debt Funds vs FDs

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

Difference Between Debt Funds & Fixed Deposit

FD vs Debt Fund

Disclaimer

The information provided by BFDL herein above is related to the Non-Partnered Banks/ NBFCs and is just for the purpose of information and under no circumstances the information provided hereinabove is intended to be source of advice or recommending any financial investment advice or endorsement of any sort

The information including interest rates with regard to fixed deposit, provided on this website is gathered through publicly available sources over the internet and is considered as accurate and reliable to the best of our knowledge. BFDL disclaims any responsibility or liability regarding inaccuracies, omissions, mistakes etc. as well as offers by the Non-Partnered Banks. The use of information set out is entirely at the User’s own risk and User should exercise due care prior taking of any decision, on the basis of information mentioned hereinabove. You are advised to visit/ contact the respective Banks/ NBFCs to verify the information before making any investment or opening an account. Further, BFDL does not undertake any responsibility or liability to update this information. YOU ARE SOLELY RESPONSIBLE FOR ANY LIABILITY OR DAMAGE YOU INCUR THROUGH ACCESS TO OR USE OF THE SITE OR SUCH INFORMATION OR MATERIALS EXCEPT WHERE THE LAWS AND REGULATIONS OF A PARTICULAR JURISDICTION CONCERNING WARRANTIES CANNOT BE WAIVED. Additionally, display of any trademarks, tradenames, logo and other subject matters of intellectual property owners. Display of such Intellectual Property along with the related product information does not imply BFDL’s partnership with the owner of the Intellectual Property of such products. 

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Frequently Asked Questions

What is the key difference between FD vs. debt mutual funds?

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.

Which investment option provides better returns: FDs or debt mutual funds?

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.

Are there any tax-saving options available in FDs and debt mutual funds?

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.

How does liquidity differ between FDs and debt mutual funds?

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.

Can I withdraw money before maturity in FDs and debt mutual funds?

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.

How are dividends taxed in Debt Mutual Funds?

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.

Which offers higher returns between FD and debt funds?

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.

How easy is it to access my money with FD and debt funds?

FDs usually lock your money for a fixed term. Most debt funds are open-ended, allowing faster redemption (except close-ended funds).

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