Are debts funds better than Bank FD ?

Better than Bank FD

Are Debt Funds better than Bank FD ?

It is a common question asked by many investors and sometimes advisors wrongly sell the case in favour of Mutual Funds . However one should understand the various risk involved in both theses investment type - Debt MF and Bank FDs ! In Debt MF you may earn better return than the Bank FD but you carry the price risk due to its mark to market valuation in terms of NAV. It is recommended for every investor to understand the basic difference between a Debt Fund and the Bank FD, to take wise decision. Of course we prefer Debt Funds over Bank FD, for many reasons :
  1. Tax benefits : In mutual Funds, your income is treated as capital Gain, if redeemed after 3 years; however in Bank FDs all your income is taxed upfront.
  2. Liquidity : In mutual Fund, you can redeem any day as per your requirement and can get your money in T+3 days; however in Bank FD you have a tenure lock-in.
  3. Flexibility : In mutual Funds, you can decide to switch from Debt to Equity anytime, if you get some advice to do so or you believe there is an upside in equity.

So let's see what is a Debt Fund ?

Equity Mutual Funds buy stocks while Debt funds buy debt fund securities like bonds for their portfolio. Securities like bonds are issued by corporates such as power utilities, banks, housing finance and the Government. They issue bonds with fixed interest rate to raise money from the public (investors) instead of taking a loan for new projects. Bonds are a promise to pay periodic fixed interest to investors who buy them.

Debt fund invests your money in a basket of bonds and other debt fund securities. When investors buy bonds with a maturity of a few years, they are lending their money to the issuer (say ABC Power Ltd.) for those many years. ABC promises to pay periodic interest to its investors during this time in return for the money they have invested in its bonds (=money lent to ABC). ABC is the borrower like a customer taking a home loan. The investor (your Mutual Fund investing your money) is the lender to ABC just like the bank is a lender to the home loan customer.

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Disclaimer :
Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing

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