Debt mutual fund Vs Fixed Deposit

DebtMutualFund Vs Fixed depositFixed deposits have always been the conventional way of investment in Indian household; however, now debt mutual funds are catching attention among investor community. In this blog, let’s analyze which one is better and why.

For this analysis, I have used SBI’s 1-year term deposit rates as bank deposit reference and Kotak Bond – Short Term Plan – Direct Plan (G) as debt mutual fund reference.

In banks, 1-year deposit rates are the highest than other tenures. Hence I took 1-year deposit rates of SBI as the reference. Since the referenced bank deposit is 1 year took short-term debt funds to compare. So that it becomes comparable.

Returns

The below table depicts the returns offered by SBI term deposits for 1 year, 2 years, 3 years, 4 years and 5 years for an investment of 1 Lakh rupees when enrolled in a 1-year term deposit with auto renewal.

SBI Term deposit SBI Term deposit returns CAGR
Investment  ₹ 1,00,000.00 NA
1 year (Invested on 02/08/2017)  ₹ 1,06,923.00 6.92%
2 years(invested on 02/08/2016)  ₹ 1,14,889.00 7.19%
3 years (invested on 02/08/2015)  ₹ 1,24,054.00 7.45%
4 years (invested on 02/08/2014)  ₹ 1,35,602.00 7.91%
5 years (invested on 02/08/2013)  ₹ 1,47,861.00 8.14%
*Returns as on 02/08/2018

 

The below table depicts the returns on investment of 100000 in “Kotak Bond – Short Term Plan – Direct Plan (G)” for periods 1 year, 2 year, 3 years, 4 years and 5 years,

Kotak Bond – Short Term Plan – Direct Plan (G) Investment Buy NAV Units Sell NAV Sell Amount Profit CAGR
1 year (Invested on 02/08/2017) ₹ 1,00,000 ₹ 32.579 3069.462 ₹ 34.292 ₹ 1,05,258 ₹ 5,258 5.26%
2 years(invested on 02/08/2016) ₹ 1,00,000 ₹ 29.910 3343.363 ₹ 34.292 ₹ 1,14,651 ₹ 14,651 7.07%
3 years (invested on 02/08/2015) ₹ 1,00,000 ₹ 27.167 3680.936 ₹ 34.292 ₹ 1,26,227 ₹ 26,227 8.07%
4 years (invested on 02/08/2014) ₹ 1,00,000 ₹ 24.708 4047.272 ₹ 34.292 ₹ 1,38,789 ₹ 38,789 8.54%
5 years (invested on 02/08/2013) ₹ 1,00,000 ₹ 22.321 4480.086 ₹ 34.292 ₹ 1,53,631 ₹ 53,631 8.97%

 

When you compare both the tables you can see that debt mutual funds had better CAGR than bank fixed deposits. Hence debt mutual funds are the clear winners here. You may now ask why I have declared debt mutual funds as winners even though the 1 year returns are lesser than the fixed deposit. The reason is debt fund we took to compare is short-term debt fund. For shorter term less than 1 year it’s better to invest in low duration funds (Ultra short-term debt funds). Low duration debt fund returns up to 1 year for the same investment period is depicted below

Kotak Low Duration Fund-Direct Plan (G) Investment Buy NAV Units Sell NAV Sell Amount Profit CAGR
1 year (Invested on 02/08/2017) ₹ 1,00,000 ₹ 2,090 47.842 ₹ 2,245 ₹ 1,07,387 ₹ 7,387 7.38%

 

Winner: Debt mutual funds

Taxation

Debt mutual funds and fixed deposits are taxed under the ETE category. Where, only the profits/ interest is taxed as per the below table.

Taxation Duration = Less than 3 years Duration = More than 3 years
Debt mutual funds Taxed as per income tax slab Taxed at 20% after Indexation
Fixed deposits Taxed as per income tax slab Taxed as per income tax slab

 

Due to indexation benefit debt mutual funds are a better investment option here.

Now let us assume both mutual funds and fixed deposits offer 8% CAGR over 5 year period. Hence an investment of

taxation on deposits and mutual funds

Except for 5% slab the taxation is very less on debt mutual funds compared to fixed deposits.

Winner: Debt mutual funds

Liquidity

Liquidity is a very important aspect of any investment. Whenever we need money we should be able to take it out easily.  Even though both debt mutual funds and fixed deposits can easily be liquidated, the fixed deposits will attract some penalty while pre-closing the fixed deposits. Hence Debt mutual funds are better over fixed deposits.

Winner: Debt mutual funds.

Safety/Risk

Fixed deposits are one of the safest asset classes as you know what is the return up front and loss of capital is very minimum as we have a lot of measures and frameworks to protect investors by government and RBI. However, in Debt mutual funds, even though the risk is low they are not as safe as fixed deposits. Also in debt mutual funds, there is also a slim chance of negative returns which is not there in fixed deposits.

Winner: Fixed Deposits.

I have now explained the various pros and cons of debt mutual funds and fixed deposits. It’s up to you to decide where to park your money.

Also read, Where can I buy mutual funds in India?

If you like this article, please shares this with your friends. Comment your questions below.

 

Tags: Debt Mutual Fund, Fixed deposit

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