Debt Mutual Funds vs Fixed Deposits: Which is a better investment option?

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Bank deposits added Rs 32,000 crore between April-May 2021 as against Rs 1.2 trillion in the same period last year.

As interest rates on FDs (Fixed Deposits) fall to a record low, between the range of 4-5%, many investors are looking at debt schemes of mutual funds as a viable alternative. The growth rate of bank deposits fell to 9.7% Y-O-Y  for May, as against their previous growth rate of around 10-11% Y-O-Y, as per RBI (Reserve Bank Of India). As for fixed deposits, their Y-O-Y growth fell from 9.5% in April 2021 to 8.9% in May. 

Although experts predict that the interest rate on FDs is unlikely to decline any further, the rise in fund inflows for April and May 2021 in mutual funds indicate higher positive investor sentiment mutual funds than FDs. Debt funds mobilized around Rs 5,37,000 crore in May 2021, which registered a fall from Rs 6,14,700 crore in April. However, as per an April 2021 report by CARE Ratings, debt funds this year still managed to witness inflows that were 1.3x times higher than the last year. 

Fixed deposits, on the other hand, made for 88.8% of total deposits, which is a slight decline from its earlier share of 89.5% as of last year (May 2020). 

Bank deposits added Rs 32,000 crores between April-May 2021 as against Rs 1.2 trillion in the same period last year. While the figures might not be very encouraging, you can still manage to earn attractive returns on your short-term funds by investing them wisely in other FDs of private financial companies or short-term debt funds. 

With Bank FDs offering lower interest rates at present, you can opt for FDs provided by financial companies, which tend to have a marginally higher rate than traditional scheduled commercial banks. Also, reinvesting your interest earnings can help you harness the power of compounding, multiplying your cumulative returns. Also remember that with FDs, premature withdrawals are a cardinal sin. 

For instance, SBI currently offers 5% on their one-year FD. However, a reduction of this maturity date by even a single day can bring down the interest rate to merely 4.40% per annum. 

“But when it comes to drawing a comparison between bank FDs and debt mutual funds, one must remember that in terms of risk, bank FDs are 100% safe, while debt mutual funds, although not as risky as their equity counterpart, still carry more risk than FDs. In an absolute sense, both FDs and debt mutual funds are not comparable”, said a Delhi-based financial planner who wishes to remain anonymous. However, “debt funds offer a higher return net and can be considered for short-term investments”, he signs off. 

 

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