Debt Mutual Fund vs Fixed Deposit-Which is a better investment product?
Last Updated : June 20, 2016, 12:22 p.m.
There is always a temptation to buy investment products as they offer healthy returns compared to your bank savings account. The interest earned on the savings account ranges within 4%-6% per annum, while returns on investment products like fixed deposit, mutual funds, ULIPs range about 7%-15% or more depending upon the market conditions. But investment products do carry an element of risk arising out of the fall in stock market and fluctuation in interest rate. Fixed deposit and debt mutual funds are considered to be relatively safer investment products. So, we have decided to compare the two to find out which one is better. First know the bits of both and then read the comparison between the two to evaluate the products.
Debt mutual funds
Debt mutual funds invest primarily in debt and fixed income securities like treasury bill, government & corporate bonds, money market instruments as well as other debt securities with a fixed rate of interest and a fixed date of maturity. They also invest a bit in the equity market.
Fixed Deposit
Fixed deposit is a financial instrument of the bank that offers a higher rate of interest than savings account. Like debt mutual funds, it also has a fixed date of maturity.
| Parameters | Fixed Deposit | Debt Mutual Funds |
|---|---|---|
| Credit Rating System | Credit rating systems such as sovereign, AAA, AA, BBB, BB are available to rate the performance of fixed deposit. These ratings determine the level of safety in your fixed deposit account. | Debt mutual funds invest in safer securities with a rating of AAA and AA. These funds are much more safer than bank fixed deposit that guarantees the safety upto Rs. 1 lakh only. |
| Premature Withdrawal | Banks generally do not allow permanent withdrawal of the sum before the maturity of the fixed deposit. But if you wish to do so, then you will have to break the FD. Few banks permit partial breaking. But in most banks, you will have to break the entire FD. | You can withdraw the amount any time. But applicable exit loads can be charged. |
| Penalty on Premature Withdrawal | Penalty of 0-15% to be levied of the initial investment on premature withdrawal. | Exit load at 0.25%-3% of the applicable NAV can be charged at the time of redemption. |
| ROI on investment | Investors normally earn interest at the rate of 7%-9% per annum on investments ranging from 1-10 years | No fixed rate of interest. But remains on the higher side on a long-term investment. |
| Taxation | A high tax rate of upto 30% based on the tax slab of the individual. Tax is also charged on the accrued interest. | Extremely tax-efficient. Long-term capital gain (Investments held for 3 years or more) is taxed at 20% with indexation. Indexation is a tool that adjusts the purchase price for inflation while calculating long-term capital gain tax. However, the gain made by selling these investments before 3 years will be treated as short-term capital gain. Tax will be charged as per the income tax slab of the particular investor. |
| Suitable for Whom | These products are considered safer and are ideally suited for someone looking to earn reasonable interest on their investment. | These are considered to be slightly volatile with a certain portion being exposed to the equity market. These investments are designed for risk-averse investors. However, with a bit of investment in the equity, these funds can also appeal investors with an eye on returns. |
| Risk Diversification | Fixed deposits rank lower on the risk diversification criteria. | Debt mutual funds allocate the assets in different instruments to offset the negative effect of one security with the gain made in other. |
As you have got the necessary information regarding debt mutual funds and fixed deposit, you stand in a better place to decide as to which one to choose. Do remember to assess your risk profile and be clear of your investment objective before choosing any of the said options.