Debt Fund vs Fixed Deposits: Which Is a Better Investment Option?

Posted On Thursday, May 12, 2022


To grow your wealth and financially secure your future, it is crucial to have in-depth knowledge about investment options before making your investment decisions. However, understanding all the investment avenues could be challenging as financial institutions offer a plethora of financial instruments you can invest in. Traditionally, many conservative investors prefer Bank Fixed Deposits (FDs) to park their savings and grow their wealth. However, over the last decade, there is increased awareness about debt mutual funds, and now many risk-averse investors consider opting for these funds. If you, too, are considering investing your money in debt mutual funds but are still befuddled about how it is different from bank FDs, this article will clear all your doubts as it elucidates both the investment options along with debt funds vs FD comparison.

What are Fixed Deposits (FDs)?

Fixed Deposits (FDs) are offered by banks and Non-Banking Financial Companies (NBFCs) to let you deposit the money in a lumpsum for a certain period at a higher interest rate compared to a Regular Savings Account.

• The Bank FD is considered the safest investment option. It is ideal for conservative investors with zero to low-risk tolerance, those approaching their retirement phase, or those who need to make an investment to get the tax benefits.

• The interest rates offered on FDs are fixed for the investor and do not fluctuate with the market conditions. Even if the financial institution changes the interest rate for that particular term, they are bound to pay you the same interest rate they had offered to the investor at the time of making the FD.

• You can open an FD for a term (duration) based on the available FD tenures of the banks/ NBFCs, which generally range from 7 days to 10 years.

• Although you can prematurely break the FD, the financial institution generally charges a penalty for it. They may charge 0.5% to 1% of the interest rate of the period for which the deposit remained with them.

What are Debt Funds?

Debt Funds are a type of mutual funds that primarily invest in fixed income instruments, such as government bonds, treasury bills, corporate bonds, certificates of deposit, repos, reverse repos, etc.

• These funds can have an exit load for the amount withdrawn before a certain time as mentioned in respective scheme information document.

• You can either invest a lumpsum amount in a debt fund or start a Systematic Investment Plan (SIP) that lets you invest a fixed amount in the fund every month.

• There are various types of debt mutual funds available, such as Liquid Funds, Dynamic Bond Funds, Money Market Funds, Corporate Bond Funds, Duration Funds, Gilt Funds, Fixed Maturity Plans, etc.

• Lastly, you should know that the fund houses charge a small fee for managing the fund, i.e. Total Expense Ratio, usually adjusted in the NAV. This fee can affect your returns.

Debt Funds vs FD:

Comparing the features of fixed deposit and debt funds and understanding the similarities and differences can help you choose the right investment avenue for your financial plan.

• Fixed Returns:

The FDs offer pre-specified fixed returns, whereas there are no fixed or guaranteed returns in debt mutual funds.

• The Rate of Returns:

The FD interest rate are fixed depending on the rate offered by the bank or NBFC you choose. Whereas debt fund returns are market-linked depending on the type of debt fund scheme you choose.

• Risk:

FD is considered to be a low-risk financial instrument, whereas debt mutual funds carry low to high risk depending upon the underlying instruments held by the respective scheme. Some debt funds may carry high credit and interest rate risk.

• Liquidity:

While both the investment options provide liquidity,. To avoid any premature withdrawal charges or exit load, you must select the tenure and plan thoughtfully considering your liquidity needs.

• Charges on Premature Withdrawal:

In case of a premature withdrawal of an FD, the bank/NBFC deducts premature withdrawal charges; whereas, in the case of debt funds, an exit load may be charged depending upon the type of debt fund you have invested in and your holding period.

• Type of Investment:

FDs generally allow investment only in a lump sum mode, whereas for a monthly investment, you can opt for a Recurring Deposit (RD), which allows regular investments at predefined interest rates . In a debt fund, you can invest either a lumpsum or via SIP.

• Charges:

There are absolutely no charges for fixed deposits. Whereas there is a nominal Total Expenses Ratio charged for managing the debt mutual funds.

• Tax Benefit:

You can avail of a tax benefit of up to Rs 1.50 Lakhs per financial year under Section 80C of the Income Tax Act, 1961, only on the Tax Saver Bank Fixed Deposit that comes with a minimum tenure of five years and does not qualify for premature withdrawal. However, investments in debt mutual funds are not eligible for such tax benefits.

• Taxation:

The FD returns are taxable as per your income tax slab. Whereas, debt funds taxation depends upon the investment duration. Short-term debt fund returns are taxed as per your income tax slab, whereas long-term gains are taxable at 20% with indexation benefit.

To Conclude:

FDs could be a suitable investment option if you are a conservative investor looking for guaranteed returns for the medium term with no/low risk. But, if you are willing to take risk investment in debt mutual funds has potential to provide market linked returns. Moreover, debt funds are a good option to diversify your portfolio with low to moderate risk avenues for your short to medium-term financial goals. Remember that debt fund returns carry interest rate risk and credit risk. Furthermore, before investing in an FD or debt fund, it is essential to create a robust financial plan, define your investment objective, assess your risk appetite, and choose the right type of FD or debt fund to achieve your financial goals.

The comparison with Fixed Deposits has been given for the purpose of general information / explanation purpose only. Unlike fixed deposit with Banks there is no capital protection guarantee or assurance of any return or insurance protection in Mutual Funds. Investments in Mutual Funds as compared to Fixed Deposits carry high risk, different tax treatment and subject to market risk. Investors are advised to take investments decision based on his / her investment objectives, risk appetite and arrive at informed decision before making any investment decision. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

View All

  • World Health Day: Build a Healthier Portfolio with Quantum ESG Best-in Class Strategy Fund
    World Health Day: Build a Healthier Portfolio with Quantum ESG Best-in Class Strategy Fund

    Posted On Friday, Apr 05, 2024

    As we celebrate World Health Day on April 7th, it's a timely reminder of the importance of wellness in all spheres of our lives.

    Read More
  • Debt Monthly View for March 2024
    Debt Monthly View for March 2024

    Posted On Friday, Apr 05, 2024

    Indian bond yields were range bound for most of March. 

    Read More
  • Equity Monthly View for March 2024
    Equity Monthly View for March 2024

    Posted On Friday, Apr 05, 2024

    S&P BSE Sensex grew by 1.59% in the month of March 2024. S&P BSE Midcap Index increased by 0.01% & S&P BSE Small cap Index declined by -4.8% respectively.

    Read More

Add To Cart

Add To Cart

Your cart is empty
Total of Lumpsum

Get In Touch

Take small steps in your financial planning to achieve big dreams! Start your investment journey today!

@@tlcomstart@@ @@tlcomend@@