Fixed Deposits (FDs) have been a part of every Indian household for decades now. The present times, however, are witnessing a slump in FDs with a marked transition toward debt mutual funds.
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.
Debt Mutual Funds vs Fixed Deposits
Banks offer a pre-set interest rate for fixed deposits based on the tenure chosen. Debt fund returns, to a great extent, depends on the overall interest rate movement. They might generate moderate returns (relatively more than fixed deposits) in the form of capital appreciation and regular income. One good thing about fixed deposits is that market highs and lows will not impact the returns you earn. So typically, debt funds outdo fixed deposits by a considerable margin during times of low-interest rates in the economy.
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
All of us know 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. Summing up With an Illustration
Ultimately, you should weigh your decision on your risk appetite, income tax slab, time
horizon, and investment goals.
Sreekanth
+971503963193
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