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Why Debt Mutual Funds Are Better Than Fixed Deposits?

Updated On Nov 13, 2021

A debt fund is a mutual fund that puts money in fixed income instruments such as government and corporate bonds, treasury bills, commercial paper, certificates of deposit and so on. SEBI has categorised and rationalised debt funds into 16 categories. It categorises debt funds depending on where they invest the corpus.

Taxation on Debt Mutual Funds and Fixed Deposits

Short-term gains (i.e. less than three years) on debt funds are taxable as per your tax slab rate. Long-term gains (i.e. up to three years or more) on debt funds are taxable at 20% with the benefit of indexation. As for fixed deposit returns, the gains will be taxed as per your tax slabs.

Inflation Adaptability of Debt Mutual Funds and FDs

Everyone knows that inflation puts a damper on savings as it leads to loss of currency value. Debt mutual funds, albeit the risk, have the potential to pace with inflation. For instance, if you have invested in an FD at 6% interest, and the inflation rate is 5%, the adjusted return would be merely 1%. Debt funds may deliver relatively higher returns.

What Has Changed Now?

Mutual funds have come to the fore in the recent few years. As a result, FDs have lost their sheen as the most popular long-term investment goal. During the demonetisation in 2016, mutual funds were able to cash in on the opportunity that became available due to the reduced deposit return rates. Also, due to the availability of tax saving mutual funds, mutual funds rose to prominence. When debt funds started giving more returns with liquidity, many low-risk investors decided to jump ship.

Why Invest in Debt Mutual Funds?

Debt funds are the closest which comes to conventional FDs in terms of risk. A debt fund’s primary goal is to give investors steady income throughout the investment horizon. So, you must choose a time horizon in line with that of the fund. You can find out about various debt funds and their duration directly from the fund houses or online or through a third party. This will help investors understand a fund’s performance concerning interest rates. It will also make it easier for you to take advantage of the market volatility by making informed decisions.

How To Invest In Debt Funds?

You may invest in direct plans of debt fund schemes through the asset management company. You could invest in regular plans of debt fund schemes with the help of a mutual fund distributor. You may consider investing in debt funds through an online platform such as cleartax invest.

Conclusion

Debt funds invest in different types of bonds whose prices rise and fall depending on interest rates in the economy. If a debt mutual fund purchases a bond and its price rises due to a fall in the interest rates, it would make additional money over and above the interest income.

Also read - Type Of Invest Plans In India

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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