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One should always look to strengthen their financial portfolio by carefully dividing the investments across various categories such as fixed deposit, mutual fund, life insurance, postal deposits, savings bank deposits and others. Each investment category has its own set of features, benefits and pitfalls. So as an investor, you must analyse in detail regarding the product where you want to invest and compare the same with other products. The best way to know which investment type will suit you the most is by assessing your risk profile, investment goals, etc. We, in this article, will demonstrate the comparison between income fund and fixed deposit. But before that, one must know what these products mean and do?
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. Fixed deposit can be opened in the multiples of Rs 10,000 across banks in India. The period of maturity in the fixed deposit ranges from 7 days to 10 years. The maturity period can extend upto 20 years in some banks. You earn the interest on your fixed deposit in the range of 7%-10% per annum. The bank returns your money, a sum of principal and interest accrued, to you after the completion of the instrument’s maturity period. Senior citizens can get higher interest rates on their fixed deposit accounts at select banks. In addition, you can get tax-saver fixed deposit account offering you deduction of tax under section 80C of the Income Tax Act. But you need to stay invested in that fixed deposit for five years to avail the tax benefits. Also, premature withdrawal is not permitted.
Income fund is a part of debt mutual funds that invest in government securities, money market instruments, corporate bonds, certificate of deposits, etc. Experienced fund managers are entrusted with the responsibility to manage the portfolio on the basis of interest rate movement and look to generate returns in both growing and falling interest rate scenarios. These managers generate interest by either continuing with the instruments till the maturity or receive gains by selling them in the debt market on consistent rally in the price of the instrument.
|Parameters||Fixed Deposit||Income Fund|
|Liquidity||Comes with a fixed lock-in period. Premature withdrawal will lead to penalties.||You can withdraw the money anytime. However, exit loads will be charged on your sell-off.|
|Fund Management||No expertise of fund managers in fixed deposit. Also, this investment carries re-investment risk. If you re-invest the proceeds during the time of falling interest rates, you can lose out on the earning.||Fund managers shuffle the investment around and look to generate returns in both up and down of interest rate scenarios by continuing with the instruments till the maturity or receive gains by selling them in the debt market on consistent rally in the price of the instrument.|
|Returns||You get returns at a fixed rate of interest||Returns are not fixed, but remain on the higher side in the long-term.|
|Tax Efficiency||You are taxed as per your income slab.||Long-term capital gain (Investments held for 36 months and above) is taxed at 20% with indexation. Indexation is a tool that adjusts the purchase price for inflation while calculating long-term capital gain tax. Short-term capital gain made by selling investments before 36 months will be taxed as per the income tax slab of the investor.|
|Suitability||It is suitable for risk-averse investors||Perfectly suited for someone looking to take a bit of risk to earn extra returns|
Now that you have got to know about income funds and fixed deposit, choose any of the options according to your risk-taking ability and the investment horizon. Don’t be overly concerned by a bit of up and down in the returns of income funds in the short-term as they can provide good returns over the long-term. But if the performance of the fund has not remained satisfactory over a span of say 2 years, then you must consider shifting to other investment products.