In India, Fixed Deposits are one of the most popular ways to save money. It is considered a traditional investment option. There are still many investors who have their entire savings in Fixed Deposits (FDs). FDs guarantee a fixed interest rate and ensure that the capital is safe, and hence come across as a lucrative investment option for many investors.
But over the past few years, Debt (& Liquid) Mutual Funds have attracted a lot of investor attention. Currently, these Mutual Funds manage a little over 12,00,000 crores of investor money. To put it in perspective - Rs. 1,20,00,00,00,00,000 is the amount currently invested in all Debt/Liquid Funds put together!
So why are informed investors moving away from Fixed Deposits and towards Debt Mutual Funds? Let us look at the major reasons below.
Liquidity - In terms of liquidity Debt Mutual Funds are at an advantage. When you invest in a Fixed Deposit, the entire amount invested needs to be withdrawn at the time of emergency cases. But that is not the same scenario in case of Debt Mutual Funds. For example, had you invested Rs. 10,000 in a Debt Fund and require only Rs. 4,000 Rupees, all of the 10,000 need not be withdrawn. You can only choose to withdraw the required amount and it will credited to your account the next working day. The remaining amount still continues to earn interest. Moreover, there is no lock-in in case of Debt Mutual Funds whereas some FDs can be locked in for up to 5 years. Imagine requiring money for emergencies but not being able to withdraw your investments since they are locked in!
Returns - Bank FD's offer an interest rate that is pre-set based on the tenure. Debt Funds have historically earned higher returns as there are fund manager actively managing and handling the investments. For example, as on date SBI provides 6.8% returns for a 1 year FD. Top performing short term Debt Mutual Funds have provided more than 7.5% in the past 1 year.
Taxation - Debt Mutual Funds solve multiple taxation issues that FDs do not. Unlike FDs where you have to pay tax on the yearly profits, in Debt Funds you pay taxes only during the time of redemption. Hence your money compounds more in Debt Funds as long as you remain invested.
Additionally Debt Funds do not have TDS (Tax Deduction at Source). But TDS is applicable in case of fixed deposits, if your profits/interest income exceed Rs.10000 then 10% of tax is deducted at source.
Considering the above factors, it is safe to say that Debt/Liquid Mutual Funds would be a better alternative to Fixed Deposits in the current scenario.