FD vs. Debt Funds: Investors looking for safe investments often get confused between fixed deposits (FDs) and debt mutual funds. Both options are known for their low risk and stable returns, but there are some key differences that can be understood to make the right choice. Let’s understand the advantages and differences between the two in simple terms.
Interest rate differentials
Fixed deposits typically offer an annual interest rate of 6-7%. Debt funds, on the other hand, vary depending on their category and asset management company (AMC). For example, money market funds have recently delivered returns of 7-7.8%, while long-duration funds have had relatively lower returns.
Differences in Taxation
Interest on fixed deposits is taxed every year, whether the money is withdrawn or not. Whereas, debt funds are taxed only at the time of redemption. In both cases, the tax is levied according to your slab rate, but the timing of taxation makes a significant difference for investors. If you are looking for a small amount and a steady fixed interest rate, then fixed deposits are the right choice. However, for larger amounts and better tax planning, debt funds may be preferred.
Which offers more flexibility?
Premature withdrawals from fixed deposits come with penalties and loss of interest. In contrast, debt funds offer a more flexible option, allowing you to withdraw at any time. If you want security and fixed interest, then fixed deposits and if you want tax benefits and flexibility, then debt mutual funds can be the right choice.
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