Debt Mutual Fund Schemes V/s Fixed Deposits 

The evolution of financial markets has opened a wide range of investment options before the investors, wherein they may choose to investment product to suit their financial goals, risk profile and investment strategy. For the conservative investors, who do not like to see much volatility in the portfolios and are content with reasonable returns, investment in fixed income products is suggested. While the only fixed income product earlier used to be bank and post office deposits, the investors may now have the option to choose to invest in debt mutual funds now. 

Such funds create a diversified portfolio, predominantly of the debt securities for the investors, which include Govt. securities (G-Secs), Commercial Paper (CP), Treasury Bills (T-Bills), Certificates of Deposit (CD), corporate bonds etc. Few benefits of debt mutual schemes are listed below:

1. Diversification – The investor may not have been able to even invest in many of such fixed income options individually, as debt securities generally tend to have large ticket investment requirement. Debt Funds enable the pooling of funds by different investors, creating a higher investment corpus which is then invested in securities with different credit ratings and pending maturities. This helps in security diversification for the investor. 

2. Mitigation of Risks – Debt securities are not commonly discussed amongst retail investors for investment. As such, investing in an unknown product is not desirable for the investor. Debt funds help the investor to take investment exposure into such securities with the help of professional fund managers, who manage the investment risks including interest rate risk, liquidity risk, credit risk etc. backed by adequate research and data analysis. 

3. Wide Range of Investment Options – A wide range of mutual fund schemes are available even amongst the universe of debt funds, including but not limited to short duration fund (investing in securities maturing between 1-3 years), liquid funds (investing in securities with less than 91 days maturity), gilt funds (investing in Government Securities), credit risk funds (investing in below highest-rated instruments). The investors may choose the debt fund suiting their investment objective and risk profile. 

Given the wide popularity of fixed deposits for parking the savings of Indian households, it becomes imperative to compare it vis-a-vis investing in debt funds. The point-wise comparison is given below:

1. Convenience to invest – Investing funds in fixed deposits tends to be very convenient for the investors, as they just need to request for it with the bank. Debt funds are equally convenient to invest, as the investment may be made even online and across the wide range of investment options. Further, the investments in debt funds are stored in digital/ demat form and thus, more convenient to be stored for records and reference. 

2. Returns – While debt funds may not offer you fixed income across the tenor of the deposit like the fixed deposits do, debt funds equip the investor with a potential of better returns amongst the debt portfolio. On the back of professional fund management, the debt funds may also benefit from the interest rate movements and credit rating upgrades, which in turn results in better returns for the investors.  

3. Risk-Return Tradeoff – Debt securities are priced depending upon the credit risk in respect of the issuer company, which is reflected through their credit rating. On the other hand, fixed deposits are generally priced by the respective banks based on their liquidity/ ALM profile. As such, debt funds offer a better risk-return tradeoff for the investors, considering that the higher risk takers are compensated with higher credit risk premium, and therefore, higher returns.

4. Liquidity – Fixed deposits provide liquidity of funds to the investor, but at the cost of premature withdrawal penalty. Further, the lower of the actual interest rate agreed and the prevailing interest rate for the invested period is given to the investor in times of such premature withdrawal. On the other hand, debt funds may be redeemed by investors at prevailing NAV. 

5. Periodical Payouts – The investor may choose to invest in periodic dividend option to avail of periodical payouts from the returns generated by debt funds. Further, the investors may also opt to register a Systematic Withdrawal Plan (SWP) to cater to periodical cash flows through the redemption of the mutual fund investments. This may be compared to ‘monthly/ quarterly interest payout’ option provided by banks on fixed deposits with them.

6. Tax Treatment – Interest from FDs (Fixed Deposits), Term Deposits and the short-term capital gains from debt funds are taxable on the tax rates applicable to the investor. However, if you have stayed invested in the debt fund for more than 36 months, the long-term capital gains are taxed at 20% after indexation. The benefit of indexation effectively allows only the real returns (net of inflation) to be taxed. Such tax incidence incentivizes the investors to stay invested for the long term.

 Given the inherent benefits debt funds carry as against the traditional fixed deposits, the investors may consider debt funds for catering to their debt allocation requirements. 

Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2017. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI TrusteeCompany Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake orinaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.