FD vs Fixed Income

For most Indians, fixed deposit (FD) is a preferred mode of investment as it brings a sense of security and predictability. It keeps market volatility at bay and offers assured returns. That is why some retail investors, especially retirees, prefer parking their money in FDs. 

However, with inflation eroding the value of money, it is essential that investors chalk out strategies that beat inflation and provide real returns. This makes it essential to look for alternative investment channels such as mutual funds to generate inflation-adjusted returns and benefit from active fund management.

Read on to know the various aspects of investing in FDs and debt funds.

Advantage FDs

  • Fixed Returns

One of the biggest draws in favour of FDs is the guaranteed and assured returns. FDs are not affected by the volatilities of the stock market, and hence their returns are fixed. However, the question to ask is – are these enough? Or are you compromising?

  • Easy to Understand and Invest

FDs are one of the easiest financial instruments to understand. They have been around for a long time and bring a sense of predictability. FDs are offered by banks, NBFCs and corporates and can be availed online, through net banking.

However, are you trading ease for sub-par returns?

Debt Funds – An Alternative Investment Avenue

Though FDs offer assured returns, investors are now mindful of the declining interest rates and the poor post-tax returns. This is a major cause of concern, particularly for senior citizens who depend on interest income from FDs.

For such investors, debt funds, managed by professional fund managers, could be an alternate investment avenue that has the potential to offer inflation-adjusted returns. Some of the benefits of debt funds are:

  • Potential for Higher Returns

Unlike FDs, where you get only the listed interest income, debt funds are actively managed and have the potential to offer higher returns. These funds invest in money market instruments, Government bonds, corporate debt, etc., with an aim to maximize your returns.

  • Capital Appreciation Through Professional Fund Management

Debt funds are managed by professional fund managers who track the market for opportunities for capital appreciation and wealth creation.

  • Flexibility to Choose, Diversify, and Redeem

Unlike FDs, debt funds allow you to spread your investments across funds. They give you the flexibility to switch out from an underperforming fund. However, with FDs, you cannot transfer your money from one financial institution to another offering higher interest rates.

Also, most debt-based funds allow partial withdrawal based on your requirements, FDs might not.

  • Post-tax Returns

Though FDs offer assured and fixed returns, the interest income is taxable. The interest earned is added to the income of the individual and taxed as per the Income Tax slab. Hence, one should consider the post-tax returns while deciding on investing in a FD. However, with debt funds, you can claim indexation benefits if held for more than three years. This brings down your tax liability.

The choice between FDs and debt funds depend on your risk appetite and investment goals. If market fluctuations make you jittery, FDs might work for you. On the other hand, if you are looking for real, inflation-adjusted returns, and competitive post-tax performance, debt funds should tick your investment box.

IDFC Mutual Fund offers a range of debt funds. Investors can choose depending on their risk appetite, investment horizon and financial goals.

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