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What is the Difference Between Fixed Deposit and Debt Funds?

    For generations and generations, fixed deposits have been the go-to investment, no questions asked. It’s safe, relatively no risk involved, and gives you guaranteed returns. But today, there are new investment options that have entered the market that entice investors with higher rates of return. This leaves us wondering whether to stick whether FDs or take a chance on the new ones!

    Before you make any investment choices, it’s best to do a little research so you know the pros and cons of each. This will allow you to make an informed choice.

    So, let’s take a look at the two different investments - Fixed Deposit and Debt Funds.

    Fixed Deposit

    This investment is a popular choice, especially in India. It requires very little financial knowledge and is very straight forward. Therefore, people prefer to invest in FDs. You deposit a lump sum for a fixed period of time and earn interest on it.

    Apart from this, FDs offer the following benefits:

    • It is a safe investment. There is no risk involved.
    • It offers a variety of tenures to choose from starting from 7 days up to 10 years.
    • The rate of interest offered is around 8% p.a. But this depends on the tenure you choose.
    • Guaranteed return of principal + interest which is predetermined before investing.
    • You can take a loan against your fixed deposit.
    • You can get a secured credit card against your fixed deposit.
    • You can choose a 5-year tenure and get tax benefits.

    These are the pros of fixed deposits. However, there are a few drawbacks that you need to consider as well:

    • You give up liquidity for the tenure you pick. If you choose to withdraw before the maturity date, you’ll be charged a penalty.
    • If you earn more than Rs.10,000 interest, then your investment is subject to TDS (tax deducted at source).
    • Fixed deposit does not account for inflation. The return on investment is decided beforehand.

    Debt Funds

    Debt funds are similar to mutual funds but instead of investing in stocks and shares, the core holdings are fixed-income investments such as bonds, government securities, treasury bills, etc. You need more financial knowledge to handle debt funds, however, there are companies that will handle that for you.

    The following are the benefits of debt funds:

    • The risk is lower than other fund investments as the returns often fall in a predictable range.
    • It is more suitable for short to medium term, unlike mutual funds.
    • It can serve as an alternate source of income.
    • It gives you liquidity in your investment.

    Before you invest in debt funds, you should be aware of the cons:

    • The risk is lower than other fund investments as the returns often fall in a predictable range.
    • It is more suitable for short to medium term, unlike mutual funds.
    • It can serve as an alternate source of income.
    • It gives you liquidity in your investment.

    Before you invest in debt funds, you should be aware of the cons:

    • Debt fund managers charge a fee called expense ratio to manage your portfolio.
    • It is linked to market risk.
    • It is subject to capital gains.
    • Your returns are not guaranteed but you can stand to earn much more than FDs if you invest correctly.
    • You might have to pay a charge to exit the fund.

    Before you make an investment, it’s best to weigh out the pros and cons and then decide if it’s suitable for you. While fixed deposits are safe but have limited returns, debt funds have a higher risk but could give you better returns. It’s wise to distribute your investments. Maintain safe ones like FDs, NSC, or PPF, and at the same time grow your wealth through new investment schemes. Be a smart investor!


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