Updated on: Sep 21st, 2023 | 10 mins read
Investors looking to invest a considerable corpus to get safer returns after retirement generally park their money under bank fixed deposits or invest them in mutual funds. More specifically, such investors prefer investing in debt funds.
While bank FDs have always been a popular investment, some experts say that debt mutual funds are better than FDs because the returns are slightly higher. Both of these options are suitable for investors with low-risk tolerance.
Debt mutual funds are relatively recent investment options introduced in the Indian market. This type of mutual fund invests most of its corpus in debt securities such as government and corporate bonds, treasury bills, money market instruments, and more. All of these are fixed-income instruments that come with a pre-decided interest rate and maturity date.
In debt mutual funds, the capital from multiple investors is gathered together and the fund manager invests it in various fixed-income instruments as per the scheme objective. According to historical data, debt mutual funds are less risky than equity or hybrid mutual funds.
Young individuals who have just started investing, as well as some retirees, may prefer parking their money under debt mutual funds rather than fixed deposits. This is because these funds tend to offer investors marginally better returns once the scheme matures.
Based on risk tolerance and other factors, the benefits of debt mutual funds are stated below:
Below are certain things that investors should keep in mind before they invest in debt mutual funds:
Risk Factors: Investors should be aware of all the risks accompanying investments in such funds. There are mainly three types of risks to consider- credit risk, liquidity risk and interest risk. Debt funds carry relatively low credit risks but are not entirely free from interest rate risks.
Expected Returns: Like any mutual fund, debt funds do not guarantee any returns because the returns are based on prevalent market conditions. Although if you observe the past performance of such funds before investing, there is a chance that you will end up investing in a well-performing fund.
Investment Objective: Sometimes, people invest in debt funds because they want a secondary or another source of income that can supplement their primary source of income. As an investor, you need to decide whether you are willing to pick an investment with risks if your goal is to create a secondary income source. You should invest in a debt scheme if its objectives align with your own objectives.
Time Horizon: Debt funds can be invested for any of the short, medium and long-term durations. You should choose the debt funds based on your liquidity requirements and investment objectives.
A fixed deposit (FD) is a type of financial instrument made available by banks or NBFCs that allow investors to lock in their money in an FD account of a bank or other financial institution for a certain period. Over this time, the deposit will generate a fixed amount of interest that can be reinvested or paid out monthly, quarterly, or annually.
Banks let investors choose the tenure to deposit their money. For example, you can deposit your cash under fixed deposit accounts from 7 days to 10 years. The higher the deposit year, the more interest you will receive from the banks.
The benefits of depositing your money under fixed deposits are as follows:
Below are certain things that you must keep in mind before you deposit your money under any fixed deposit:
The difference between debt funds and fixed deposits is illustrated in the table below. This will help you understand whether debt mutual funds are better than FD.
|Features||Debt Mutual Fund||Fixed Deposits|
|Risks||Investors will have to tolerate nominal risks.||FDs carry relatively lower risk.|
|Returns||The returns are linked to market conditions.||Returns are fixed irrespective of the market conditions|
|Investment Options||As an investor, you will have the option to invest via lump sum or SIP.||You will have to invest the entire corpus at one time.|
|Liquidity||People prefer to invest in debt mutual funds because they have high liquidity.||Fixed deposits can also be withdrawn prematurely, however banks may charge a penalty fee.|
|Withdrawal||Debt funds generally don’t carry exit load except in a few cases, so you don’t always have to pay withdrawal charges||When you withdraw your money prematurely, you will have to pay a certain penalty to the bank.|
|Investment expenditure||Investors have to incur fund management charges as per the expense ratio of the scheme.||There are no management charges involved in fixed deposits.|
The above mentioned information can help you to decide whether to invest in debt mutual or FD. Before investing, ensure that you understand your risk appetite and investment goals. Many debt funds have low risks and give optimal returns but are less safe compared to fixed deposits. On the other hand, fixed deposits are not that high yielding in terms of returns. Consider these factors to make an informed decision.
Who should invest in debt mutual funds?
The following kinds of people can choose to invest in debt mutual funds:
Who should invest in fixed deposits?
Fixed deposits are a suitable investment for the following types of people, and they can deposit their money if they wish to:
What are the different types of debt funds?
The different types of debt funds in which one can invest are as follows:
What are the different types of fixed deposits?
Individuals can choose to deposit their money under the following kinds of fixed deposits: