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There are generally two types of investors- one who has zero risk tolerance and the second who are willing to take some amount of risk with the hope of fetching higher returns from their investments.<br>This presentation will give you an idea of whether you should invest in debt mutual funds(https://www.edelweiss.in/oyo/mutualfund) or bank fixed deposits.
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Introduction Bank FDs: Fixed deposit an investment account offered by both banks and privatized financial companies, where an individual can deposit money for a fixed rate of interest. An investor deposits a fixed lump sum of cash in their fixed deposit account for a predetermined period that varies from one investor to another. Debt Funds: Debt funds are a type of mutual funds that collect money from investors and invest this pool of money in various fixed income securities like corporate bonds, debentures, government securities and treasury bills. They come with a lower amount of risk as compared to equity funds and have the potential to offer capital gains to investors over a certain period of time.
Comparison Let’s compare FDs and debt funds on the basis of liquidity, risk, and taxation to identify which one is a better investment option. Liquidity: Fixed deposits come with a predetermined lock-in period meaning you cannot withdraw funds till a specific period of time. And in case you liquidate your FD prematurely, there is a hefty fee involved. On the contrary, an investor can withdraw from his/her debt fund on any business day. Risk: Investing in FDs allows investors to enjoy a fixed interest rate on their investment. Fixed interest rates are generally lower hence the returns will be lesser too. Debt funds, on the other hand, invest in fixed income securities like government securities, corporate bonds, and similar money market instruments. Thus, debt funds brings down the overall risk of your portfolio and generally provide higher interest rates as compared to FDs.
Taxation: Debt funds are more tax-efficient than FDs and several investors invest in debt funds just to reduce their annual taxable income. With FDs, an investor is charged annually on their interest gained as per their tax slab. Debt funds are a type of mutual fund. Gaines derived from mutual fund investment before three years are taxed as per the lax levied on short term capital gains (STCG). If you hold your investments for more than one year than you pay long term capital gain (LTCG) tax.
Conclusion When it comes to investments, ultimately, you should weigh your decision on your risk appetite, income tax slab, time horizon, and investment goals.
