What is the difference between a Fixed Deposit & a Debt Mutual Fund?

  • Deposit
  • 21 Days ago

Written by - Shriram

Debt Mutual Funds have recently become a popular investment option because they have a low-risk factor. With a Fixed Deposit (FD), you will always get assured returns on all your investments. FDs and debt mutual funds have their respective benefits. You are only taxed on a debt mutual fund when the deposit matures. Whereas one of the special features of FDs is that you can take a loan against your deposit.

With the changing market and the economy, every investor is always worried about the risk involved when making investments. FDs have always been the most popular investment scheme. But recently, there has been a trend where individuals have aggressively started to invest in debt mutual funds too. There is a considerable difference between debt mutual funds and FDs. While a debt mutual fund can give you higher returns, an FD will ensure you get your entire principal amount plus interest upon maturity.

Invest in a Shriram Fixed Deposit to get the best interest rates for your investments. You can get the additional interest of 0.25% per annum on all renewals after the maturity of your FD. Check interest rates through the Shriram interest rate chart to know how much you can get for an investment of your choice.

To understand the differences between a fixed deposit and a debt mutual fund, you must first know how each of these investments functions.

What is a Debt Mutual Fund?

A Debt Fund is also referred to as Income Fund or Bond Fund and is a mutual fund scheme that invests in fixed income instruments like corporate or government bonds, treasury bills, commercial papers, government securities, etc., offering capital appreciation. Each of these schemes has a pre-decided maturity date. You can earn the interest on these deposits upon maturity. While there are no guarantees, the returns of these investments are within an expected range. This feature makes a debt mutual fund an attractive option for investors looking to invest in low-risk schemes.

Features and Benefits of a Debt Mutual Fund

The primary goal of a debt mutual fund is to give you a steady income throughout the investment period. You need to select a specific period to avail of these benefits. Let's take a look at some of the features and benefits you can get by investing in a debt mutual fund:
 
  • Debt funds have very low risk:

The economy and its movements have an impact on debt funds. Since debt mutual funds invest in fixed-income schemes with a known interest rate and maturity value, they are considered to have lower risk when compared to equity funds. This is because even with market fluctuation, the returns you will get will be within an expected range.
 
  • Debt Funds Duration:

A debt mutual fund investment must be made for a predetermined period. This period is the duration you will have to wait to get back the invested amount plus the interest earned. All debt mutual funds have an investment range from one day to ten years.
 
  • Fixed-Income Security:

Debt mutual funds generate returns through interest and fixed-income securities. According to the interest rate, the debt mutual fund will have a stable and regular cash flow stream with a low risk of being impacted by market fluctuations.
 
  • Tax Efficiency:

Debt mutual funds are only taxed in the year you redeem the deposit. This makes it the most efficient investment option regarding tax claims.
 
  • Liquidity:

Debt mutual funds allow you to redeem your investment on any business day, and no extra charges or penalties will be imposed upon the premature withdrawal.

What is a Fixed Deposit?

A fixed deposit locks your money in the deposit account for a certain period, and you can earn decent interest on this deposit. Some banks and NBFCs (Non-Banking Financial Companies) can allow you to deposit an amount for a minimum of 7 days and a maximum of 10 years. An FD has multiple benefits based on your requirement. With a Shriram FD, senior citizens can avail of an additional interest of 0.50% per annum, which adds up to 8.40% per annum.

Features and Benefits of a Fixed Deposit

A fixed deposit is an investment scheme offered by banks and NBFCs to help you develop good savings habits and grow your wealth simultaneously. You need to invest a lump sum of money for a fixed tenure in an FD. You have the choice of receiving the interest earned periodically or once upon the deposit's maturity. Here are some of the benefits and features of a fixed deposit you need to know:
 
  • Assured Returns:

With any FD, the returns are always guaranteed. You will get the principal amount you invested with the interest earned upon maturity of the deposit. Market fluctuations will not impact your funds, and any revisions to the interest rates are implemented after maturity or at the renewal of the deposit.
 
  • Rate of Interest:

The interest rate of a fixed deposit depends on the tenure you select and the financial institution you are investing with. Check the interest rate you receive using the Shriram FD calculator.
 
  • Flexible Tenure:

You can select a tenure ranging from 7 days to 10 years. You can always withdraw/close your deposit account during this term, but you will be charged a penalty for premature withdrawal.
 
  • Returns on Investment:

The interest you earn on an FD depends on the maturity period of the deposit. The longer the tenure of the deposit, the more interest you can make. You can also opt for a cumulative FD in which you will receive the interest periodically.
 
  • Loan against FD:

A unique feature of an FD is that you can avail of a loan against your FD in case of emergencies. However, this feature will only allow you to take a loan up to 90% of your investment amount. You also will not be permitted to withdraw the FD amount if you have taken a loan against it.

Differences between an FD and a Debt Mutual Fund

Now that we know all the features of a debt mutual fund and FD, we can compare them to see the differences between them:
 
Features Fixed Deposit Debt Mutual Fund
Risk No risk investment Low-risk investment
Deposit Frequency Lump sum Can choose between lump sum and periodical
Returns Not market linked Market linked
Taxes Chargeable on interest Only chargeable upon maturity
Premature withdrawal Penalty charged Some debt funds have zero charges. But for others, charges will apply

Which Investment Should You Consider?

Based on the above information, you can now decide whether you need to invest in a debt mutual fund or an FD. While there is a low-risk factor to debt mutual funds, an FD is the most secure option you can consider.

Invest in a Shriram FD to help your savings grow so that you can quickly achieve all your future goals. Shriram Finance Fixed Deposit comes with an FD rating of "[ICRA]AA+ (Stable)" by ICRA and Rated "IND AA+/Stable" by India Ratings and Research (A high degree of safety), which indicates high credit quality. Start a new fixed deposit now to give wings to your dreams.

FAQs

1. How is a fixed deposit better than a debt mutual fund?

An FD is more secure than a debt mutual fund, and market fluctuations do not impact the interest rate. A debt mutual fund is good for investors who are okay with the risk factor.

2. Which is suitable for a longer investment, an FD or a Mutual Fund?

The longer you invest in an FD, the higher interest rates you can receive with no risk. With a Shriram Fixed Deposit, you can get interest up to 8.40% per annum, which includes an additional 0.50% for senior citizens.

3. What is the level of risk associated with debt funds?

The debt fund returns depend on the market, which can prove to be risky for those investing in this scheme.

4. Where should I invest: FD or Debt Mutual Funds?

With the benefits and security of a fixed deposit, you can earn interest on your FD without worrying about the risk. However, if you prefer to consider the risk, you can invest in a debt mutual fund.

Key Highlights:

  • You get assured returns if you invest in a fixed deposit.
  • You can take a loan against your fixed deposit.
  • A debt mutual fund has low risk, making it a popular investment option for investors that don't mind the risk factor.
  • Taxes on debt mutual funds apply only at the year of your deposit maturity.