What’s the difference between Debt Funds & Fixed Deposits? Let’s have a look

Most of the Indian investors would opt for a traditional bank fixed deposit (FD) as it considered to be the most safest option of all. Reports suggest that almost 50 percent of Indian households have their money parked in FDs. Secondly, debt mutual funds have also paved their path into the Indian investor’s portfolio and are considered to be suitable investment option after FDs.

Let’s analyse the difference between the two, which will help you clear any doubts about these two investment vehicles.

What are the risks involved between the two?

If you compare FDs and debt funds on risk, bank FDs provide assured returns .

Debt funds invest in debt and money market instruments like commercial papers, certificates of deposits, corporate bonds, Government bonds etc., hence they are subject to market risks and there is no assurance of safety like fixed deposits. Secondly, there are two distinct debt funds – interest rate risk and credit risk, where the risk of the former fund depends on the duration profiles of the fund whereas the risk of the latter depends on the credit ratings of the underlying securities.

Investors need to understand the risk factors of both and then proceed to invest accordingly.

How are the returns calculated in fixed deposits and debt funds?

FDs pay the interest at the end of the deposit term or at regular intervals, as chosen by the depositor, whereas returns of debt funds are market linked. Debt funds have managed to surpass returns as compared to FDs of similar tenures. You can calculate the exact amount that your fixed deposit would give you by using the ET Money FD Calculator.

How liquid are fixed deposits and debt funds in comparison?

Both are highly liquid as there is no lock-in period. However, some banks charge premature withdrawal penalties for fixed deposits, whereas debt funds might attract exit load which is charged on redemption amount. Once the exit load period is over, there are no charges. It is advisable to check the exit load structure of debt funds before investing in them.

Conclusion

It is clear that those who want their capital to be safe and gain assured returns, fixed deposit is the best option. For those who don’t mind taking that extra risk for higher returns along with enjoying taxation benefits can opt for debt funds.