Debt MFs vs Bank FDs: There was a time when every extra penny was invested in bank fixed deposits (FDs). Our parents have all ended up putting their money in FDs as during those times, that was the best option to earn interest while ensuring that the principal amount remains protected. But in today’s world, the horizon of investment has grown much wider, and depending upon one’s appetite for risk, investors can choose the best option to grow their money. In the recent few years, mutual funds have come to the fore because of the lucrative interest rates. So, have bank FDs lost their sheen?
Debt MFs vs Bank FDs
Debt Mutual Funds (DMFs) offer slightly higher returns than bank FDs with the benefit of early withdrawal.
Banks offer a pre-set interest rate for fixed deposits based on the tenure chosen.
Advantages of debt MFs over bank FDs
1)”Like any mutual fund, a Debt Mutual Fund (DMF) operates at a portfolio of securities, in this case, debt securities. This allows the investors to participate in a slightly higher interest-yielding opportunity than a bank FD,” said Prashant K Goyal, Associate Professor, JAGSoM
2) A good fund manager can ensure a high level of safety of the money and an investor should consider a DMF that invests in AAA-rated securities. Safe investment coupled with a slightly higher return makes a DMF a better option, added Goyal.
3) The other benefit of DMF is that one can exit from them after a very small lock-in, unlike bank FDs where one has to bear a penal rate in case of early withdrawal.
4) With the change in the tax treatment DMFs have come at par with bank FDs which means the returns are taxed as any other income of the investor. Else the DMFs were a clear winner earlier.
5) An important aspect to be kept in mind is that debt securities are sensitive to interest rates and the returns are inversely proportional to the interest rates in the economy whereas the bank FDs are not.
6) The tax benefits for long-term debt mutual funds were eliminated by the government as of 1st April 2023 by an amendment to the Finance Bill.
Short-term gains (i.e. less than three years) on debt funds are taxable as per your tax slab rate. Long-term capital gains on debt mutual funds are now taxed at the investor’s tax slab rates, rather than the previous 20% with indexation benefit and 10% without that as a result, if the investor is subject to the highest tax bracket, this rate would be 35.8%. (including surcharge and cess)
As for fixed deposit returns, the gains will be taxed as per your tax slabs.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 20 Jul 2023, 02:36 PM IST