5 Reasons Debt Mutual Funds are better than Fixed Deposits
Mutual Funds don’t always mean equity-linked Mutual funds. They are having various types, one of which is debt related MFs. They primarily invest in debt-related options giving you an assured return on your investment. If you are ready to compromise on a lower ROR, then debt MFs are the best bet for you.
They even work well if your goals are in the near future, or if you do not wish to subject your hard-earned money to the volatility of the equity market.
Here in this article, we will discuss the benefits of putting your money in a debt fund as opposed to a fixed deposit.
Taxes affect your FD returns
The compounding effect in an FD is lower due to TDS or Tax Deduction at the source. You have to pay tax on the accumulated interest every year. FDs give you interest whereas MFs would provide capital appreciation. Debt funds have a much lower tax in the beginning, but FDs are taxed at the maximum rate. So it is always better to park your funds in an MF. Here is a rough example of the numbers
Your money is safe in both cases:
There is a credit rating system in place, with the help of which one can understand the safety level of a particular fund. Below I have mentioned a few:
Normally FDs and their returns are assured by the government up to a monetary value of 1 Lakh INR, so obviously they have an AAA rating, which means high level of safety. But then they lack on the interest part, inflation eats up most of your money in the long run.
On the other hand, debt funds do not have a specific rating. If you wish to know that then you need to look at the portfolio in which it is investing. It is critical that you choose a fund which matches your needs.
Easy access to your money
We all know that emergencies can come at any time, and you would need your money then. Both FDs and Debt funds have different processes for cash withdrawal.
From Debt MF:
You are able to withdraw cash at any time from your MF, up to the value of your investment. Depending on the bank it may take anywhere between 1-2 days for the money to reach your bank account.
That’s not all, whatever appreciation your money has had until that time, you can get that also.
Tip: It must be noted here that there are some Debt fund which would charge you for early withdrawal. It can be as much as 0.25% of the amount invested.
If you need your FD or even a small portion of it, then you would have to break the entire FD. There is no provision to take a portion of it. This may lead to a penalty (1- 1.5% of investment) as well and a lower interest rate. Some banks offer no interest of the FD was for a year and you broke it before that tenure. These rules change from bank to bank.
Tip: It is better to not spend or invest anything from your salary. Let it accumulate in your NRE savings account. Once you sign of, you can just make an FD out of it and ask your bank to issue a CC (Cash Credit) on that FD. The limit can be made up to 90%. Use that CC for all your expenses. This way your initial amount stays intact.
Debt Funds have high returns: Post Tax
You need to know that FDs offer a fixed rate of interest. That is not the case wit Debt Funds. Their rate of interest also comes to the same, but it varies in response to the market. There is a good chance of you getting a higher return as compared to FD. There your investment gets locked in with the rate which was prevalent at the time of making the FD.
More paperwork is involved in FD
Declaring and paying tax on FDs every year can be a real mess if you have multiple FDs in your name. If you have had an early withdrawal then the task gets even more complicated. I don’t see any point in going through this ordeal just to get a minimal return on my investment.
In the case of MFs, you only pay capital gains tax when you wish to withdraw the money.
All in all, it is a better option to invest in a Debt Mutual fund as opposed to a Fixed deposit. You can read more about it here.
Also Read: 5 Benefits Of a Term Plan