India believe in its tradition and follow it religiously. And when it comes to investment bank FD's is a big tradition. FD's are seen as secured way to grow your money. It is considered the best option to earn on interest while ensuring capital protection. Our grandparents and parents have followed this tradition from the bottom of the heart. However, nowadays debt mutual funds have replaced bank FD's. Demonetisation has played critical role in gaining the popularity of mutual fund. Demonetisation boosted bank deposits and reduced return rates. That made investor think of other option. So, it doesn’t make sense to rely on bank fixed deposits when you have tax-saving mutual fund schemes that can double your money in the tenure you opt for FDs. So let's see how debt funds are good to consider as an investment option.
Difference between FD and Debt Funds
Banks offer a pre-set interest rate for fixed deposits based on the tenure chosen (starting from 5 years). The returns on the FD's are fixed. while in debt fund returns are solely dependent on the market movement – they have historically earned higher returns (sometimes even more than double) in the form of capital appreciation on top of interest. Even though FD's are of fixed return. They normally don't beat inflation rate. For instance, if the rate of return on your FD is 7 percent and the inflation rate is 6-7 percent, you just end up gaining the same amount what you had invested. or in saome cases, little extra. On the other hand, considering the past performance of debt fund they have successfully delivered the rate of return ranging between 9-10 percent for the long term investment.
Barring a few exceptions—Fixed Maturity Plans (FMPs) and Interval Funds among others, debt funds are highly liquid. Whereas, in case of bank FDs liquidity is linked with the tenure of the FD. The option to prematurely withdraw a bank FD is, of course, available. The setback is, you will lose out on a portion of your expected returns, and a penalty is charged. Thus, bank FDs offer medium-to-low liquidity.
The other big difference is that of taxation. Returns from bank fixed deposits are interest income and as such have to be added to your normal income. Since many investors are in the top (30 per cent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for less than 36 months (though TDS will not generally be deducted). However for debt funds held longer than 36 months, returns are classified as long term capital gains and are taxed at 20 per cent with indexation.