Debt Mutual Fund Or Fixed Deposit: Which Is Better For You? has always been a topic of discussion, let’s dive into detail about it today. A debt mutual fund is an investment scheme that puts money in fixed-income assets, like corporate and government bonds, money market instruments, etc. On the other hand, fixed deposits (FDs) are investment instruments where you deposit a lump sum amount with the bank for a specific tenure at a fixed rate to earn interest income.

Before April 2023, both investment instruments have been widely used for capital appreciation. However, the government removed the indexation benefits on capital gains in the current financial year. Earlier, you had to pay fewer taxes with indexation benefits on capital gains.

Post the changes, the gains on debt funds are added to your income and charged as per your income tax slab. However, regardless of these changes, preference for debt funds may vary from one investor to another depending on their financial goals and short- and long-term needs.

Let’s explore more on debt mutual fund or fixed deposit and which one is a better as investment vehicle:

Debt Mutual Fund: These mutual funds are safer than purely equity-oriented mutual funds as they mainly invest in fixed-income assets like central and state government bonds, treasury bills, top-rated corporate bonds, debentures, and other low-risk money-market instruments.

Depending on the individual requirement, debt mutual funds offer investors many advantages to build wealth over time. For instance, they can ensure capital appreciation in the long term with minimal risks. Investors seeking regular income and investment security can consider debt funds. These funds can be part of your portfolio along with equity and other asset classes for stability.

Besides compounding benefits, debt funds can provide higher returns when rates fall. As returns are taxed only during withdrawal, people can save more. There is also no penalty for withdrawing funds at any time. Debt funds can provide around 6-8 percent annually. However, the returns may vary depending on the performance of their underlying assets, which may fluctuate due to changes in interest rates and economic factors. Investors can face financial loss if the bond issuer (corporate) fails to pay on time, although such cases are rare. However, government and public sector undertakings (PSUs) bonds have little risk.

Fixed Deposits (FDs)

Fixed deposits (FDs) offer guaranteed interest income for deposits, depending on their tenure. Currently, the highest interest rates of most banks stand at over 7 percent on certain FDs. However, senior citizens can get around 25-50 basis points (bps) higher than the general public.

Compared to debt mutual funds, FDs are relatively safer. Most nationalized banks are safe. Additionally, RBI has secured FDs up to Rs 5 lakh. FDs also offer investors flexibility in choosing the rates and tenure, which vary from bank to bank.

Moreover, FDs have zero investment cost, making them the most attractive vis-a-vis the debt funds, which have an expense ratio, depending on the scheme. However, the accrued FD interest

is subject to tax deduction at the source (TDS). The TDS will be deducted every time your fixed deposit matures and you renew it.

Finally, there is no clear winner here. Investors can choose the instrument that suits them best based on their investing horizon, financial needs, and risk-taking ability.