For conservative investors, one of the key wealth goals is to invest in a safe and secure investment option. There are several investment options for such investors, but we take a hard look at only two such options: fixed deposits and debt mutual funds. Both offer low but assured returns on investment.
Typically, fixed deposits (FDs) offer anywhere between 6 to 7 percent interest per annum, and debt funds offer slightly higher returns based on the category and AMC (asset management company) you choose.
Different categories of debt mutual funds include money market funds, low duration funds, liquid funds, short duration and long duration funds, among others. Similarly, the interest rate on fixed deposits also varies based on the tenure of the deposit.
So, if you are also in a dilemma over which investment option to go for, make sure you consider at least the following factors.
FDs vs debt mutual funds: Consider these factors
I. Interest: One of the key factors to consider is the interest income earned on fixed deposit or debt mutual funds. Higher the income, greater the incentive. As mentioned above, interest income varies from category to category and from fund to fund.
For instance, money market funds delivered anywhere between 7-7.8 percent per annum, and long duration funds, at the same time, delivered relatively lower returns during this period.
II. Income tax: Another factor that holds considerable significance is tax liability on interest income. In the case of FD, interest is taxable even if the amount is not withdrawn. On the other hand, interest on debt funds is taxed only when funds are redeemed.
“In FDs, tax is payable on the accrued interest every year, which means you pay tax even if you haven’t withdrawn your FD. In debt mutual funds, tax liability arises only when you redeem your units. Both are taxed as per the individual’s slab rate, but this difference of timing matters,” says Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance.
III. Amount of investment: Another significant factor is the amount of investment. When you are locking a small amount, a fixed deposit is recommended. And if you are locking a large amount, you may opt for a debt fund. “If you are investing a smaller amount, fall in a lower tax bracket, and value the peace of mind of assured returns, then FDs are a very sensible choice,” adds Ms. Tandale.
IV. Flexibility: Last but not least, both these investment options have varying degrees of flexibility. While debt mutual funds are quite flexible in a way that you can redeem them anytime whereas fixed deposits, when withdrawn prematurely, lead to a small penalty and loss of interest.
“For investors who have very well-defined investment horizon, FDs can make sense but for those that may need money at any point of time the flexibility of debt mutual funds may be beneficial,” says Alekh Yadav, Head of Investment Products, Sanctum Wealth Management.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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