Monday, 4 August 2014

Fixed Deposits Vs Debt Mutual Funds

Why do people invest a lot into Debt Mutual Funds? WHy don't they just put their money in Fixed Deposits in banks? Because Debt Mutual Funds offer many advantages as compared to Fixed Deposits.

What are Long Term Debt Funds?

A mutual fund scheme is a pool of money contributed by various investors. This money is then invested into different types of financial products as pre-decided by the scheme.
Long Term Debt Funds are mutual funds which invest into long term debt instruments like government bonds & highly credit rated corporate bonds.
Unlike fixed deposits, these funds invest in a highly diversified portfolio across government securities and highly credit rated companies. As a result, the funds provide higher returns.

Advantages of Long Term Debt Funds over long term Fixed deposits:

Higher Pre-Tax Returns:
To compare the 5 year returns of debt mutual funds & fixed deposits, we have compared the returns from 2009 to 2014.







We can see that the pre-tax returns for debt mutual funds were slightly higher than fixed deposits.

Long Term Tax Benefit
Fixed Deposit long term returns are taxed as per tax bracket of investor which may be 20% or 30% for some investors.
In comparison, debt funds returns for more than 3 years get indexation benefit & the tax rate is capped at 20% and can never go beyond 20%. Since last 5 years due to higher inflation, the tax has been negligible.













Source: AMFI India website, *Tax Bracket considered is 20%


It is very clear from the chart that debt mutual funds emerge as clear winners for investors in income bracket of 20%.
For an investors in tax bracket of 30%, fixed deposit post tax returns will be even lower.

Diversification:
Compared to fixed deposits which invest in the security of only 1 bank, debt mutual funds invest in government bonds & corporate bonds. This diversification helps to get higher returns.

Higher Pre-Tax Returns:
For an investors in tax bracket of 30%, fixed deposit post tax returns will be even lower.

What should an investor do?

Rather than keeping cash in savings account or investing in short term fixed deposits of 1 year, an investor should invest the short term portfolio in Liquid Mutual Funds due to the many advantages & higher returns it offers.
Our online trading account, helps a user to buy or sell mutual funds online at the click of a button and also on phone.
So get a trading account now! Registration process is easy & free!

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