Fixed deposits (FD)is one of the popular investing avenues of Indians. Maybe the craze for FDs among Indians is only next to gold. For many decades, individuals have relied on fixed deposit to fulfill their financial goals. It is a safe investing option for risk averse investors. Other investment option for investors who don’t want to take high risk of equity markets is debt mutual fund. Mutual funds is nothing but a pool of money contributed by investors and managed by an expert fund manager. There are many different types of mutual funds and one of the categories is debt mutual fund that caters to investors whose objectives are capital protection with moderate growth.
With a lot of news around defaults by various companies, debt mutual funds had become the centre of the controversy. And, as fixed deposits and debt mutual funds are both meant for low risk appetite investors, let us understand the various parameters that can help you to decide whether you should invest in fixed deposits or debt mutual funds.
If your main objective of investing is capital protection, fixed deposits would be the better option for you. In case of debt mutual funds, companies can’t give the assurance of capital protection and returns. Hence, FDs score over debt mutual funds in this aspect. There are different types of fixed deposits and they come with different risks. A corporate fixed deposit carries higher risk than a public sector bank and as a result gives higher interest as well. But if you can’t live with the risk associated with debt mutual funds which may include paper defaults and downgrades or wrong investment call by a fund manager, fixed deposits may be the ideal investment option for you.
The interest rate on fixed deposits can be anywhere from 7% to 7.75%. The FD interest rates keeps on changing based on the interest rate set by the Reserve Bank of India. However, the interest rates will be the pre-defined interest rate till the maturity date. It will remain same even during financial crises. You can calculate the final amount that you will receive on FDs by using a FD calculator. But it may change for the years or months. You may find the banks or corporates are not offering the same interest rate.
Currently, interest rate are going south with RBI cutting another 25 bps to 6%. Typically, banks follow the interest rate set by RBI. With two rate cuts in a row, it gives ample to the banks to cut their deposit rates.
The returns on debt mutual funds are not assured and are linked to the market. However, debt mutual funds have the potential to deliver higher returns than fixed deposits. The returns may vary according to the market conditions and interest rate movements. FD calculator does not work with debt mutual funds as the returns are expected based on past returns, market conditions etc.
However, it needs to be noted that returns from fixed deposits may not be inflation beating. So, if you want inflation beating returns and you can digest market volatility, then you can invest in debt mutual funds.
Senior citizens can avail higher interest in fixed deposits. Senior citizens receive nearly 50 to 75 bps higher on FDs. The 50 bps may not seem a lot but the effect will prominent when calculated for a large sum of money. However, in case of debt mutual funds, there are no special benefits for senior citizens. Hence, fixed deposits may be the better investment option for senior citizens.
Fixed deposits come with a lock-in period and you have to pay penalties if you want to break your fixed deposits. On the other hand, there is no lock-in for open-ended debt mutual fund. However, few funds may have exit loads if units are redeemed within a specific period.
The taxation structure in fixed deposit and debt mutual funds is different. In case of fixed deposits, the interest received is fully taxable. In case of FDs, tax at source (TDS) is applicable at 10% if the interest income in a financial year exceeds Rs. 10,000. In case of debt mutual funds, short and long term capital gains are applicable. Short term capital taxation is applicable if the mutual fund units are redeemed before three years and the gains are taxed as per the income slab. If you stay put for more than three years, you become eligible for long term capital taxation at 20% with indexation. Indexation is nothing but factoring the rise in inflation. In this case, you only pay capital gains if the rate of inflation is less than the gains.
Conclusion: If you want your capital to be protected and earn steady returns, fixed deposits can be better saving option for you.
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