Debt mutual fund vs fixed deposits: What should investors opt for?
fixed deposits (FDs), small savings schemes and debt mutual funds. Although most retail investors invest a small portion in the small savings schemes in order to save for the purpose of taxation, the other asset categories such as debt funds and fixed deposits help in wealth creation.
Debt mutual funds: There are a total of 314 income, debt-oriented schemes with total assets under management (AUM) of ₹13.76 lakh crore, shows the January AMFI data. Overall, there are 16 sub-categories within debt schemes such as overnight funds, liquid funds, money market funds, short duration funds and medium duration funds.
The most popular ones are liquid funds and money market funds with a total AUM of ₹4.30 lakh crore and ₹1.55 lakh crore, respectively. ALSO READ: How to choose the right debt mutual fund? Types, risks and rewards explained Although both (FDs and debt funds) are similar financial instruments to the extent that their returns are guaranteed and modest vis-à-vis returns given by equity, but they have a set of differences as well which we list out here: Rate of Returns: The returns delivered by fixed deposits are relatively lower than those given by debt funds.
While most FDs offer 6 to 7 percent interest, debt mutual funds deliver anywhere between 7-8 percent return in one year. Tax treatment: When seen from the tax treatment’s perspective, the difference ceased to exist when in Finance Act 2023, indexation benefit of long-term debt mutual funds was phased out.
This means capital gains on debt mutual funds are taxed at the investor's tax slab without indexation just as the case with fixed deposits. Volatility of returns: Returns on fixed deposits can be locked and then interest rates do not change for the duration of
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