All of us know about fixed deposits, so first lets see the meaning of debt funds. Debt fund is a mutual fund which mainly invests in a mix of debt or fixed income securities such as treasury bills, government securities, etc. They have generally fixed rate of interest and fixed maturity date. Fixed deposits are generally preferred by risk averse investors.
1. Debt funds are more tax efficient than fixed deposits.
In fixed deposits, if your income increases to Rs10k or more then bank will deduct 10.,3% from your income & amount of fixed deposit is taxed every year irrespective of its maturity. And investor has to submit form 15H or 15G to escape TDS.
In case of debt funds, if investment is made for one year then its income is considered as long term capital gain and is taxed at either 10% or 20%, after indexation. Gains from debt funds can be set off against your short term and long term capital losses .
2. Rate of returns
In fixed deposits rate of return is generally between 6-10% but in case of debt funds it may vary between 7- 12% .
3. Debt funds are more liquid than fixed deposits
Pre mature withdrawal is allowed but it attracts a penalty of 1% on the interest rates.
If funds are redeemed before one year then 1% exit load is applicable and if funds are redeemed after one year then no charge is involved,
3. Greater flexibility in debt funds
You can invest small amounts every month in debt funds but it is not possible to invest in fixed deposits everytime you have 4-5k in your account.
4. Every day’s growth is considered
In fixed deposits, rate of return is fixed for whole time period.
In debt funds you can take advantage of each day’s growth by investing in open ended debt funds.
CONCLUSION: By considering above discussion it can be seen that although debt funds involve some charges but they are better option as compared to fixed deposits for risk averse investors .