The best way to make income, while keeping your money safe, was to deposit all excess money – bonuses and raises – in FDs. At some point in their lives, our grandparents and parents did so.
What has changed since then?
As a result, mutual funds have gained traction in recent years. FDs no longer serve as the most popular long-term investment option. As a result of lower deposit return rates during demonetization in 2016, mutual funds gained popularity. Many low-risk investors abandoned debt funds when they started offering higher yields in exchange for liquidity. Mutual funds have gained popularity as a result of the availability of tax-advantaged mutual funds.
What Are the Benefits of Investing in Debt Mutual Funds?
When it comes to risk, debt funds are quite comparable to traditional FDs. The fundamental target of such funds is to offer a consistent income throughout the investment time frame. Therefore, you should select a timeline that aligns with the fund’s. To be aware of an array of debt funds and their corresponding durations, you may get info from fund houses either online or through a third party. This will help investors comprehend the interest rate performance of the fund, in addition to helping them exploit market volatility by making informed choices.
Consider the distinctions between fixed deposits and debt funds
Interest rates on fixed deposit funds are determined by banks based on the term they specify. The total interest rate change has a significant impact on debt fund performance. They may provide modest returns in the form of capital appreciation and regular income. One of the advantages of FDs is that they are not affected by stock fluctuations. As a result, debt funds often outperform FDs when interest rates are low.
Debt mutual funds and fixed deposits are subject to taxation
Fixed deposit returns will be taxed according to your tax bracket. Short-term profits on debt funds will be taxed at your tax slab rate. Long-term gains on debt funds will be taxed at 20% with indexation.
Debt Mutual Funds and FDs' Inflation Adaptability
It is well known that inflation reduces savings because it decreases the value of currencies. Debt mutual funds, however, can keep pace with inflation despite the risks. For example, if you put in a savings account with a 6 percent interest rate and the inflation rate is 5%, your adjusted return will be just 1%. A debt fund may yield a better return than an equity fund.
Consider your risk tolerance, tax bracket, time horizon, and investing objectives before selecting an investment.
