Even though most parents and grandparents are using fixed deposits for the most of their lives, there are some benefits of using debt fund that will help you beat inflation and grow your money. The goal is the same, to put the money aside. Today, there are lots of people who invest in fixed deposits because it provides guaranteed interest and capital protection. That usually means that your money is not going anywhere, and it will be safe as well as fixed interest.
The world has changed in the last few decades. That means that lifestyles, aspirations, and dreams have changed too and even the economics are not what they used to be. Fixed deposits may not be efficient enough today as before, and that is the reason why people began investing in debt mutual funds.
Fixed deposits vs. debt mutual funds
- Higher Returns:
Fixed deposit investors don’t want to move directly to debt funds, but still, that is the better option that you might consider. The first reason why debt fund is way more efficient is that you will get higher returns. Of course, fixed deposits will give you guaranteed interest, but most people don’t know that interest is also taxed as income tax slab. The higher your tax bracket, the more you end up paying it, from the small interest that you earn from fixed deposits.
- Beat Inflation
Even though interest from the fixed deposit is guaranteed, returns from debt funds are not. But still, it is a safe investment because returns are always worth of risks. After all, through debt fund, you can easily beat the inflation. In the same time, a post-tax interest rate of fixed deposits is not enough for the money to grow and to prevail the rate of inflation.
Fixed deposit has different types of lock-in periods, which means that you cannot take money in the first few years because you are risking in losing the interest. Debt funds are liquid, which means that you can easily withdraw every cent that you have invested plus interest.
When you invest money in fixed deposit that means that you cannot invest it further to another bank in order to get bigger interest. With debt funds, this kind of flexibility is the main advantage. You can easily move from one fund to another.
Debt funds are much more tax efficient. Short term returns are taxed per tax slab and long term ones at 20% after indexation, which can easily reduce to 6-7%. In case that you can afford a slight risk at debt fund, you can easily be amazed at the percentage of income that you will get. However, the main problem is that on fixed deposits you are entering into the non-negotiable fund, while debt funds are much more liquid and prone to your change of heart.