There was a time when all excess money — bonuses and raises – was put in bank FDs. At some point in their lives, our grandparents and parents have all deposited their money in FDs. It was the finest way to make income while keeping your money safe.
Mutual funds have risen to prominence in recent years. As a consequence, FDs are no longer the most popular long-term investment option. During the 2016 demonetisation, mutual funds were able to take advantage of the opportunity created by lower deposit return rates. Mutual funds have gained popularity as a result of the availability of tax-advantaged mutual funds. When debt funds began to offer higher yields in exchange for liquidity, many low-risk investors opted to abandon ship.
In terms of risk, debt funds are the most similar to traditional FDs. The basic purpose of a debt fund is to provide consistent income to investors throughout the course of the investment horizon. As a result, you must choose a time horizon that corresponds to the fund's. Directly from the fund houses, online, or via a third party, you may learn about numerous debt funds and their durations. This will aid investors in comprehending a fund's interest rate performance. It will also help you take advantage of market volatility by allowing you to make more educated judgments.
Fixed deposit interest rates are pre-determined by banks and are dependent on the term specified. The total interest rate change has a big impact on debt fund performance. They may provide modest returns in the form of capital appreciation and regular income. The fact that stock fluctuation has no influence on the returns you get is one of the benefits of FDs. As a consequence, debt funds often outperform FDs during periods of low interest rates in the economy.
Short-term profits on debt funds are taxed at your tax slab rate. Long-term gains on debt funds are taxed at 20% with indexation. The gains on fixed deposit returns will be taxed according to your tax bracket.
Everyone understands that inflation reduces savings by causing currency value to depreciate. Debt mutual funds offer the ability to keep up with inflation, notwithstanding the risk. For example, if you put in a 6 percent interest savings account and the inflation rate is 5%, your adjusted return will be just 1%. Debt funds may provide better returns than equity funds.
Finally, consider your risk tolerance, tax bracket, time horizon, and investing objectives before making your pick.
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