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Why Are Debt Mutual Funds Considered Better Than Fixed Deposits?

The temptation can be to invest in equities to make most of their high-return proposition. But they can come down rapidly in investment value with weak market sentiments owing to any political and economic unrest. So, if you canu2019t stay calm through the market fluctuations, it clearly means you have less risk appetite. With that, you come under the category of investors who want the safety of the capital and stable returns. Keeping that in mind, you could think of choosing from debt mutual funds and fixed deposits u2013 arguably the best investment options for conservative investors. However, debt MFs are considered better than FDs due to the following reasons.

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Why Are Debt Mutual Funds Considered Better Than Fixed Deposits?

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  1. WHY ARE DEBT MUTUAL FUNDS CONSIDERED BETTER THAN FIXED DEPOSITS?

  2. The temptation can be to invest in equities to make most of their high-return proposition. But they can come down rapidly in investment value with weak market sentiments owing to any political and economic unrest. So, if you can’t stay calm through the market fluctuations, it clearly means you have less risk appetite. With that, you come under the category of investors who want the safety of the capital and stable returns. Keeping that in mind, you could think of choosing from debt mutual funds and fixed deposits – arguably the best investment options for conservative investors. However, debt MFs are considered better than FDs due to the following reasons.

  3. Comparatively Better Returns – Debt mutual funds can offer greater returns than fixed deposits. The returns on debt fund investments can be around 8%-9% compared to 6%-8% of fixed deposits.

  4. Tax Efficiency – Debt mutual funds are considered more tax efficient compared to fixed deposits. If you earn interest of more than ₹10,000 in a financial year on your fixed deposits, the tax deducted at source (TDS) will be levied at 10% on the proceeds. The TDS will go up to 20% if you don’t have a Permanent Account Number (PAN) linked to the FD account. In contrast, debt funds when they are redeemed after 3 years will offer you indexation benefits, which would inflate the purchase price to an extent to reduce the capital gains in terms of inflation. The reduction in gains (inflation-adjusted) would further decrease the tax liability.

  5. Increased Number of Choices – Debt funds can be categorized into the following • Liquid Funds • Ultra Short Term Funds • Short Term Funds • Dynamic Bond Fund • Gilt Funds • Monthly Income Plans (MIPs) • Fixed Maturity Plans (FMPs)

  6. So, you can see the number of choices you have when it comes to investing in debt funds. Fixed deposits, on the other hand, are limited in type. You can only make a choice between the banks to open a fixed deposit account.

  7. Support of Fund Manager – The Asset Management Companies (AMCs), which offer debt mutual funds to investors, hire efficient fund managers who take care of your money every second. As they have been through the thick and thin of the market over the years, they are able to balance the portfolio in accordance with varied circumstances. These managers ensure the money invested is diversified to help you achieve your goal. But, there’s no one at your helm when it comes to FDs.

  8. Best Debt Funds to Invest in Now that you know how debt funds have the edge over FDs, it’s time you choose the right fund for you. You can choose from the following list of debt MFs.

  9. SBI Magnum Gilt Fund The fund, which aims to generate stable returns to the investors, invest in a myriad of government securities with the average maturity likely to be more than 3 years. It has provided a return of 7.87%, 7.95%, 10.04% in a span of 1 year, 3 years and 5 years, respectively. You can invest in it with a minimum lump sum of ₹5,000.

  10. ICICI Prudential Liquid Fund The fund aims to offer reasonable returns to the investors while also ensuring a greater degree of liquidity. Its 1-year, 3-year and 5-year returns have been 7.46%, 7.11% and 7.68%, respectively. Invest in this fund with a minimum lump sum of ₹5,000.

  11. Baroda Pioneer Liquid Fund The fund invests the assets in a portfolio of money market and other debt instruments, thereby ensuring reasonable returns and enhanced liquidity. It has offered a return of 7.55%, 7.17% and 7.73% over 1 year, 3 years and 5 years, respectively. You need to make a minimum lump sum investment of ₹5,000 to buy the units of this fund.

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