The biggest debate that lies among Indian investors is whether they stick to conservative investment avenues or they should invest in market-linked schemes like mutual funds. While most Indians even today prefer to invest in traditional investment avenues, what they fail to realize is that they are missing out on making a commendable long term corpus. Mutual funds may not offer fixed returns, but they offer better risk adjusted returns. A lot of people who have now started to realize that investing in conventional investment avenues is only going to lock their money for the long run are shifting to debt mutual funds. Debt funds are less volatile than equity mutual funds and offer dividends as well, something that conventional schemes do not offer.
Today we are going to discuss the major differences between debt mutual funds and fixed deposits.
What is a debt mutual fund?
A debt fund is an open ended mutual fund scheme that invests a majority of its investible corpus in debt instruments and fixed income securities to generate capital appreciation. The investment objective of a debt mutual fund is to offer stability and deliver decent returns by investing in corporate and government bonds as well as in fixed income securities like commercial papers, debentures, treasury bills, company fixed deposits, CBLO, etc. Unlike equity mutual funds who investment portfolio is constantly exposed to market volatility, debt mutual funds offer stable returns without exposing your finances to any higher risks.
What is a fixed deposit?
A fixed deposit, or most commonly known as bank FD (fixed deposit) is a conventional investment product that takes lumpsum money from investors and invests it for a fixed period that can be three years, five years, seven years, or more. Nowadays, FDs are also available on 12-month basis and have become way flexible than earlier. Investors are promised interest on the money which they invest in a fixed deposit. At the end of their investment journey, investors receive the sum invested at the money that has compounded during the investment tenure.
Difference between debt mutual funds and fixed deposits
| Parameter | Debt fund | Bank fixed deposit |
| Rate of return (approximate) | 8%-10% | 5%-6% |
| Dividends | The debt fund manager may issue dividends whenever the scheme outperforms | Bank fixed deposits do not offer any dividends |
| Liquidity | Debt fund investors have a high liquidity portfolio which allows them to buy or sell their debt fund units and receive equivalent sum in the registered bank account | Investors cannot break the lock in period of their bank FD, an if they do there is a penalty fee involved |
| Investment option | Investors can either make a lumpsum investment or they can opt for the option of Systematic Investment Plan (SIP) | There is no SIP option, investors can only invest in bank fixed deposits via onetime lumpsum investment |
| Withdrawal | Investors can submit their order request to the AMC and can withdraw any amount of money from their debt fund portfolio to tend to their income needs | If you have to break your FD, you will have to pay a penalty fee to the bank |
| Management costs | Debt fund investors have to bear the expense ratio which is usually nominal | There are no management costs involved |
Debt fund investors have the option of modifying their investment portfolios to tackle inflation. However, this option is not available for bank FD investors. On the other hand, debt funds carry a low to moderate risk profile whereas bank FDs have almost zero investment risk. Both investment avenues have their pros and cons and investors should consider these before investing.