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To understand the difference between fixed deposits and debt mutual funds, let us first take a look at the features of both these savings channels.
Debt Mutual Funds
A mutual fund is an investment vehicle that pools money from investors and invests the accumulated corpus in a wide range of capital market securities. Mutual fund schemes allocate their investments in different asset classes like debt, equity, gold, etc. The mutual funds that focus their investments mainly in debt securities are called debt mutual funds.Debt funds are further categorized based on the issuer of the debt instruments in their portfolio. For example: gilt funds invest mainly in government securities, corporate bond funds invest in bonds issued by companies and PSUs. Debt funds could also be classified based on the tenure of the debt securities like liquid funds, medium duration funds, short-term plans, ultra-short-term plans, etc.
Fixed Deposits
Fixed deposits are a financial product offered by banks that yield interest which is paid out at regular intervals. They are the most popular form of term deposits in India. The depositor may even choose for the interest to be ploughed back and compounded into the FD. Fixed deposits are considered to be an easy investment product for risk-averse investors. Although they have proven to be one of the safest avenues of investment, there have been instances of banks defaulting.
Debt Mutual Funds vs Fixed Deposits
The significant points of differentiation between debt mutual funds and fixed deposits are:
| Basis | Debt Mutual Funds | Fixed Deposits |
| Quantum of Return | Comparatively higher but variable | Fixed but comparatively lower |
| Volatility in Returns | Comparatively higher as returns are market-linked | Almost negligible |
| Liquidity | Higher can exit from the debt funds by placing a redemption request However, usually, an exit load of 1% is levied on redemption before 1 year, except in case of most liquid funds | Lower as fixed deposits come with a lock-in period and impose a fine on withdrawal before maturity |
| Diversification | Is achieved as debt funds invest in numerous instruments | As fixed deposit |
| Tax Implications | STCG on debt-oriented funds are taxed as per the investor's slab rate while LTCG is taxable at a flat rate of 20% with indexation benefit | Gains on fixed deposits are taxed as per the investor’s slab rates |
Investors must understand the pros and cons of each investment option and make a calculated decision.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.