Debt funds vs FD (Fixed Deposits) is a question that can become self- explanatory. While understanding the definitions of both of them.

What do you mean by Debt funds and Fixed Deposits

Fixed Deposits: It is also named as a term deposit. That gives capital and income guarantee for recent time of the maturity of the instrument. Banks remain to pay the scheduled interest rate completely the security of one’s investment. Irrespective of the rise or drop in their card rates during the security. Interest income from Fixed Deposits is completely taxable

Debt funds: Debt mutual funds refer to a broad category of mutual funds. That produce returns for investors by investing in fixed income forming securities. These securities can be :

  • Corporate bonds
  • Commercial papers
  • Government bonds
  • COD (certificates of deposits)
  • Treasury bills
  • Debentures
  • Money market instruments.

Just like other mutual fund investments, one can buy or redeem the units of debt funds at their daily NAVs all go round.


Debt Funds vs FD (Fixed Deposits)

debt funds vs fd

Let’s look at a quick view of a difference between debt funds and Fixed Deposits:

A short wat to  compare between Debt Mutual funds and Bank Fixed deposits

Basis of differentiationDebt Mutual FundsBank Fixed Deposits
Return RatesMarket-linked changeableFixed
Inflation Fixed ReturnsPossibly HighUsually low
Risk FactorModerate to Highlow
LiquidityHighLow to moderate
Premature WithdrawalCertified subject to suitable exit loadApproved, but directed to a pay fine.
Value of InvestmentExpense ratio (ER)No expense
Status of TaxDetermined on STCG or LTCGAccording to Tax Slab

Which is the valid investment choice? Fixed deposit or debt mutual fund?

To know about which is a better option. One needs to evaluate the following points:

  • Security of Capital invested (debt funds vs fd)

FDsDebt funds
  • Have a credit rating method that analyses and divides investments based on the overall security of the first capital invested.
  • The classification and rating method takes into record several factors. Like stocks and securities or avenues being invested in, the time span, the prevailing market status, its volatility, etc. They give one a true idea of how one’s investment can be supposed to perform and how to secure one’s investment is.
  • Are insured by the government up to the limit of Rs. 1 Lakh
  • Do not have a rating practice, but the security of the investment is calculated on the investment portfolio. Estimated investment security levels are analysed.
  • Include a lot of careful analysis just to manage the security of the investment.
  • Are not confirmed by any authority to any limit.
  • Early withdrawal from investment (debt funds vs fd)

Fixed DepositsDebt Mutual funds
  • Do not permit withdrawals prior maturity period. If a withdrawal is required, one will have to break their FD.
  • Few banks provide for biased withdrawal, but in maximum states, the FD will have to be completely broken.
  • Breaking an FDs appears in a cheaper rate of interest and payment of fines.
  • Fines range from 0-15% of the first invested value.
  • Any value can be taken out from the debt mutual fund account.
  • Amounts can be dissolved at any time, and the mutual fund continues to run on the remaining amount.
  • No loss of interest is there.
  • Fines are imposed in the form of exit load. Varying from 0.25% – 1% and totally appropriate for shorter than 1 year.
  • Valuations of Returns on Investment (debt funds vs fd)

FD Debt Funds
  • Work on the basis of a fixed interest rate that’s said prior one invest.
  • Prevailing interest rates are about 8 – 9 %.As for investments > 1 year. This does not switch even in financial emergencies or volatility.
  • Allows financial preparation and planning.
  • Assured return on investment.
  • Supports for calculation of the exact value of money that can be assumed as complete return on investment.
  • No fixed prior communicated interest rates.
  • Interest Rates must be selected based on past fund performance and investment portfolio.
  • No assured returns on investment.
  • Returns Rate is directed to market volatility and variations in the rate of interest.
  • Tax Liability (debt funds vs fd)

Fixed DepositDebt Mutual funds
  • Gives a huge rate of tax. Up to 30% depending on the investor’s individual tax rate.
  • Tax is relevant also on the accumulated interest which hasn’t been received yet.
  • Future income that intensifies is minor than in the state of non-taxed dividend income.
  • Provides the equal rate of tax as FDs throughout the first year.
  • Taxed at a cheaper rate than FDs within the initial year and 3rd year.
  • A tax-free from 3rd year onwards.

Must read: Tax planning

Tax saving investment

  • Inflation flexibility (debt funds vs fd)

FDsDebt Funds
  • For example, one has invested in an FD at 6% interest and the inflation rate is 5%, the fixed return would be only 1%.
  • Fixed Deposits may give fewer returns.
  • Everyone understands that inflation puts a restraint on savings as it begins to loss of currency value.
  • Debt mutual funds have the potential to measure inflation.
  • Debt funds may give comparatively higher returns.


Finally, in debt funds vs fd one should consider their choice on their risk appetite, time horizon, and investment purposes. Hence, when the interest rates are at the top and one notice many possibilities for economic growth. It makes a reason to opt for debt funds than fixed deposits. One may get enough funds at economical prices.
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