Investors have made it a point to gather their funds in the form of bank deposits. However, it is a dilemma for customers to choose between debt mutual funds and fixed deposits. This is because the debt funds are becoming a competition to the assured benefits expected from fixed deposits. It is important to understand that both of these schemes have similar functions and display close economic output. But, there are differences that can't be ignored while considering the best option:
Safety - Bank deposits in the country are renowned for security. Debt funds, like all mutual funds, involve market risks and incidents of market-based complications are common. But, the Security and Exchange Board of India (SEBI) thoroughly supervises the amount of risk and looks after the fulfilment with assured results. Funds also lose efficiency because it is entirely dependent on risks of the market to which they are exposed.
In case of fixed deposits, those which are left for a long time have to bear these troubles. But fixed deposits face no loss of value or money. Large public sector institutions hold fixed deposits and are assured of highly safe investing environments. FDs are usually guaranteed by governments till Rs.1 lac, after which banks choose credit ratings according to their own policies.
Tax Levying - Income from FDs and Debt Funds are different. Banks subtract TDS (Tax Deducted at Source) from FDs. This is informed to the investor when starting the plan. However, there are taxes on income from interests every year. Therefore, it is not a hassle-free process. In case you withdraw money before your FD matures, you will gain less income even if you have paid your taxes properly.
Debt funds which are yielded longer than 36 months are taxed at 20% and termed as ‘long capital earnings'. Investors also get indexation benefit after 36 months, which reduces the tax component significantly. Those held less than 36 months are similar to the Fixed Deposits. Iplan Wealth assures investors interest through proper planning and guidance.
Differential Returns - 6-7% interest rates are assured for FDs held above a year as per current market scenario. Therefore, we can know the amount of money we are supposed to receive and invest accordingly.
Returns for debt funds are not promised. But, don't lose hope because history shows that they have also granted an 8-9% return rates, even though they are accompanied by risks. Carefully choosing those with a lower risk rate is very important. So, debt mutual funds are preferred more by informed investors.
Liquidity - Debt funds are normally guaranteed within 2-3 working days and any amount can be withdrawn. The return is the fund accumulated within the invested period. 0.25%-0.5% fee is applicable when the investor is exiting or leaving a scheme, which was held for less than one year.
If FD money is withdrawn before the maturity period, a low rate of interest is collected and a penalty 0-1.5% of invested amount is demanded. Even if you want to withdraw a smaller amount, you usually have to break the whole FD. Only 1% is deducted from returns. Otherwise, they are as promised during the starting period till withdrawal.
It is recommended that debt mutual funds are chosen over fixed deposits because they offer high levels of liquidity, capital security, and high returns post-tax due to indexation benefit, which make them a perfect alternative to fixed deposits.