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Debt Funds and Fixed Deposits: The Investing Conundrum

Most investors face a challenge while choosing the best mode of investment. The challenge further convolutes itself when two very similar investment options – Fixed Deposits and Debt Funds – cross an investor’s way. Fixed Deposits and Debt Funds have been the part of a long standing debate regarding which is better than the other. Let us take a look at how they work.

Fixed Deposit vs. Debt Funds

Fixed deposits are one of the most popular modes of investments favoured in India. They are among the preferred risk-free investment options as they provide high returns. They also have a negligible chance of defaulting and are considered the safest way to redeem returns. In simplest terms, in a fixed deposit account, the investor deposits the money for a pre-decided period and a fixed rate of interest is payable at the end of that period.

Debt funds are a type of mutual fund but here the investments are made in the fixed income earning instruments. These may include government bonds, corporate deposits, RBI bonds and money market instruments. These are usually managed funds, and thus thought to be risky, especially as compared to fixed deposits.

Safety, Tax Returns and Withdrawals

One of the best advantages of fixed deposits is that they are safe. FD interest rates record a significant rate of returns. However, it is important to note that interest on fixed deposits is taxable and it reduces the net amount that you earn on your investment. The interest on your fixed deposit would be treated as income and will be taxed under the bracket that you fall into. Banks also deduct TDS on interest earned on Fixed Deposits.

However, in actuality, the safety for both – FDs and Debt Funds is nearly the same. With careful assessment of the credit rating of the fund you’re investing in, debt Funds can prove to be a better returns generating instrument for you.

Debt funds also provide a marginally higher return as compared to that offered by fixed deposits. Moreover, debt funds also offer relaxation in taxation and with zero TDS deduction.

Fixed Deposits do not permit premature withdrawals under any circumstances. Your money is locked away for good until it matures. If you must, you will be asked to pay the penalty for premature withdrawal to redeem your money. However, in case of debt funds, there are options available with open-ended and close–ended debt funds. Open-ended funds give you the freedom to retract your money at any point of time from the mutual fund while close-ended funds have some predefined lock-in periods.

In conclusion, it is safe to say that mutual funds provide a professional management of your money, and with all the market risks evaluated carefully, you can benefit more from investing in a debt fund. They are perfect for short term thought-out investments with all risks considered. But, if you’re planning on investing in a risk-free investment option, you should go with fixed deposits.

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