Fixed Deposits have been a part of every Indian household for decades now. In recent years, moreover, it is witnessing a slump in FDs with a marked transition towards the debt mutual funds. In this article, let’s explore why the debt mutual funds are better than the fixed deposit.
More liquidity than fixed deposits
Debt funds are liquid in nature. They offer you the option of withdrawing the amount invested anytime & also your money is transferred the very next day into your account. Also, you have the option of partial withdrawal without affecting the entire investments.
They are more tax-efficient
Debt funds are more tax-efficient in the long term. A debt fund income after a one-year investment is treated as a long-term capital gain and taxed at 10% or 20% indexation. The indexation benefits depend on how long you hold the debt fund. The longer you hold the more benefit you will get. No, TDS is deducted in this fund, whereas in the fixed deposits, if income exceeds more than 10000 per year, the bank will deduct TDS. Fixed deposit incomes are taxed on annual basis, whereas till the investor redeems the units in debt funds, the tax is deferred indefinitely.
Your returns can be higher
If compared to those of other options such as fixed deposits and bonds, the tax returns from the debt funds are higher. Also, when there are changes in interest rates, the debt funds give higher returns. The investor gains from accrued interest on the bonds in the portfolio as the debt funds returns are associated with the currently fixed deposit returns. If the return on investment declines, then the value of the bond in the portfolio shoots up, which leads to capital gain for the investor?
Debt funds, compared to bonds and fixed deposits, are far much more flexible. You cannot imagine opening a fixed deposit every time if you have savings of around INR 3000-4000 instead, you can invest small amounts every month using SIP. You can also withdraw a sum from your investment every month, and this is usually for retired individuals who need a fixed income every month. Also, in debt funds, you can shift the money to an equity fund or any other scheme of your choice from the same fund house.
Also Read: Why SIP is the ideal investment strategy