We all know that fixed deposits hold an integral part in helping Indian households save and earn fixed interest on the invested sum. However, one cannot cast a shadow over the fact that the current situation of interest rates in India is not a healthy one. With interest rates falling as low are 4% to 5%, investing in other debt related schemes makes more sense.
Here are a few reasons why investing debt mutual funds in the current scenario is better than investing in fixed deposits –
You might be well aware of the fact that fixed deposits come with a predetermined lock-in of 5 years. This means that once you invest an amount, you cannot withdraw your investments till the maturity period. And if you do, you may have to pay a penalty. However, no debt scheme has any such lock-in period. This gives debt fund investors the liberty to either withdraw some of their fund units or the entire investment at any given time. Also, some schemes like liquid funds have an instant redemption facility that allows the investor to receive the eligible amount within 24 hours of selling their scheme.
When it comes to fixed deposits, the investor has to invest the entire investment sum right at the beginning of the investment cycle. Once they invest, they cannot add any additional sum to their existing fixed deposit. However, those who wish to invest in debt funds need to invest their entire investment sum right at the beginning of the investment cycle. They can invest small fixed sums regularly through a Systematic Investment Plan (SIP). SIPs are highly flexible and give investors the option to pick the investment sum, as well as the monthly date at which the sum will be paid towards the debt fund. Investors can even use the SIP calculator, to calculate the total assumed returns that their SIP investments can help them earn at the end of their investment journey.
Multiple investment options
Under fixed deposit, there aren’t as many options as there are under the debt scheme category for investors. As of now, there are 16 different debt mutual fund product categories. Since there is a wide range of options to choose from, there might be a debt scheme available catering to the financial needs of almost every type of investor. Every debt scheme is designed uniquely and has a different maturity period and a unique underlying portfolio of debt related instruments as well.
Returns and dividends
Fixed deposits offer fixed returns. Debt funds on the other hand offer return based on the credit quality of their underlying debt instruments. Like any other mutual fund scheme, debt funds do not offer guaranteed returns and are prone to interest rate risk and credit risk. However, debt funds might be able to better returns than FDs as most of them invest in a diversified portfolio of AAA+ rated and government backed securities. Also, fixed deposits do not offer any dividends whereas investors have an option for the dividend option and earn a regular income with debt mutual funds.
One thing where fixed deposit wins is the expense ratio. There are no management costs for fixed deposits and hence there is no expense ratio involved. On the other hand, debt investors have to pay the expense ratio based as levied by the fund house on the scheme. However, the expense ratio can be considered as a viable expense as investors receive the expertise of fund managers who choose credible debt securities to build a solid income generating, debt portfolio.