Fixed Deposit and Debt Funds are popular investment instruments in India, especially because of the low-risk factor associated with them. Debt funds are those mutual funds which primarily deposit investor’s money in a portfolio made up of debt securities treasury bills, corporate bonds, debentures, etc. of varying tenures. On average, the best debt funds give returns around 7-8% in the span of 3 years and 7.8-8.5% for the 5 years span. Debt funds carry low market risk as compared to equity funds.
Under a fixed deposit, a separate account is created for the investor in which a fixed amount is invested for a fixed period on a fixed rate of interest. Banks and NBFCs both guarantee assured returns on their fixed deposits which are governed as per RBI guidelines. Thus, they do not carry any market risk factor and their return is higher than the savings account. Safety of principal is one of the main motives because of which it has been widely popular among those investors who prefer safety over returns. The fixed deposit interest rates depend on the amount and tenure, that is why banks only declare minimum and maximum rate of interest on fixed deposit.
Now let us look at various scenarios when Fixed Deposit is as good as debt fund:
- The first scenario is when your investment in the fixed deposit is lower than Rs. 1.2 lakhs.The annual interest (6.5-7.5%) will not exceed Rs. 10,000. in this case, no TDS will be deducted from your FD interest amount.
- Another scenario would be that your total income does not cross the minimum taxable threshold after taking into account all the exemptions. In this case, you can invest in FD, and the amount invested can be above Rs. 1.2 lakhs and it will be as effective as a debt fund. You won’t require tax benefits of the debt fund. However, for this, you will have to submit the Form 15G/15H as applicable to you, so as to inform the financial institution in which you have opened fixed deposit account that TDS shouldn’t be deducted.
- In case you are confused about the right debt fund or is unable to accessit easily then you can also consider investing in Fixed Deposit. It ensures greater security than debt funds along with a fixed return on investment. Fixed Deposit also gives flexibility in choosing the tenure as can anywhere between 7 days to 10 years. So, you can even use it as a short term investment instrument if you want to only invest in debt funds for the long term. Also, you can even use it as a strategical investment instrument for maximizing returns on your investment portfolio.
- Also, apart from banks NBFCs also provide the facility of Fixed Deposit that to at a higher rate of interest than banks, without any compromise on the safety element of Fixed Deposit. So, investing in a fixed deposit of NBFC will actually earn you almost similar return as that of debt funds.
The above-stated scenarios give you enough option to use not just debt fund but fixed deposits as well to earn better returns on your investment without compromising on the safety of your principal amount.