Why are Debt Mutual Funds better than Bank Fixed Deposits, know all the things
Every person wants to increase their wealth due to rising inflation and expenses. For this he is looking for the best investment option so that he can get more and safer returns with less risk. Both mutual funds and fixed deposits are considered good options for investment. But due to the attractive interest rates in mutual funds, the FD craze has come down. Debt mutual funds are also attracting customers in mutual funds. Let us tell you why Debt Mutual Funds are better than FDs.
What is Debt Mutual Fund?
A debt fund is a mutual fund scheme that invests in fixed income instruments, such as corporate and government bonds, corporate debt securities and money market instruments etc. that offer capital appreciation. Debt funds are also called fixed income funds or bond funds. Debt funds are ideal for investors who aim for regular income but are risk averse.
Why is debt fund FD heavy?
Debt Mutual Funds (DMFs) offer slightly higher returns than bank FDs with the advantage of quick withdrawals. Banks offer pre-determined interest rates for FDs based on the tenure chosen. A good fund manager can ensure a high level of safety of money and an investor should consider DMFs that invest in AAA-rated securities. A safer investment with slightly higher returns makes DMF a better option
Investors also get an advantage from DMF that it can be exited after very little lock-in, whereas in bank FD you cannot. If you have pre-mature exit from FD then you will have to pay penalty.
After the change in the tax system, DMF has become equal to Bank FD. This means that the return is taxed at the same rate as the investor’s other income.
Debt securities are sensitive to interest rates and returns are inversely proportional to interest rates whereas bank FDs are not.
On 1 April 2023, the tax benefit for long-term debt mutual funds was abolished by the government by amending the Finance Bill.
Short-term gains (ie less than three years) on debt funds are taxed as per your tax slab rate.
