Why fixed deposit is as important as Debt Fund?

If you are worrying about falling interest rates leaving you with no fixed income options, you are right – if you’re only fixed income option is bank Fixed Deposits (FDs). But did you know that falling interest rates can actually be a great opportunity in the debt market? Read on.

You may have often heard analysts say that there is an inverse correlation between bond prices and interest rates movement. Yes, that is where the opportunity lies.

Consult a Financial Planner before Investing in any financial product.

Moneymindz.com will make it easy for you. Just give us a missed call on 022-62116588 to explore our India’s best Free Advisory Service.

MONEYMINDZ DO NOT SELL ANY FINANCIAL PRODUCTS, WE ONLY PROVIDE UNBIASED, FREE, ON PHONE FINANCIAL ASSISTANCE

Safety First

Bank Deposits are one of the safest avenues for savers in India with an almost negligible chance of default (although there have been instances of co-operative and local banks defaulting). As with all mutual funds, there are no guarantees in debt funds. Returns are market-linked and the investor is fully exposed to defaults or any other credit problems in the entities whose bonds are being invested in. However, that's a legalistic interpretation of the safety of your investments in mutual funds.

Your investment comes to a total of less than Rs. 1.2 Lakh.

If you don’t plan to invest more than Rs. 1.2 Lakh (lump sum or in installments), then the interest earned per year (@7.5% or 8%) is less than Rs. 10,000. In this case, you won’t incur any TDS on your FD and thus your interest earned is not eaten away by taxes.

Taxation

The other big difference is that of taxation. Returns from bank fixed deposits are interest income and as such have to be added to your normal income. Since many investors are in the top (30 per cent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for less than 36 months (though TDS will not generally be deducted). However for debt funds held longer than 36 months, returns are classified as long term capital gains and are taxed at 20 per cent with indexation.

Liquidity

Turning to liquidity, open ended debt funds proceeds are credited within a period of 2-3 working days depending on factors such as whether an ECS mandate is registered. Fixed Deposits are also typically available at 1-2 days’ notice, but usually carry a penalty if they are redeemed before the maturity date. Debt funds also have exit loads or charges that are usually levied for redemptions, typically upto 3 years. These exit loads are not applied to liquid funds with just a few exceptions for very short periods of time.