Mumbai: A businessman or a retired individual or a professional with a large corpus always face the investment dilemma of whether to invest in traditional savings instruments like a fixed deposit or to look out for other avenues like debt mutual funds.
While fixed deposits provide safety of capital with assured returns, debt funds have the potential to provide higher returns with better taxation provisions.
“Debt mutual funds are better placed than fixed deposits in the current scenario as these avenues not only provide higher returns on capital, liquidity is also better than fixed deposits of banks,” Rohit Grover, Certified Financial Planner at Mumbai-based advisory firm, MoneyFrog told the Finapolis.
With retail inflation hovering below 4% in last one year, the Reserve Bank of India (RBI) reduced the repo rate by 0.25% to a six year low of 6% in August this year. This has prompted banks to reduce both deposit and lending rates. Currently, the highest card rate offered by most banks doesn’t exceed 7.5% per annum in fixed deposits of various tenures. Compared to the fixed deposits, short-term debt funds have generated returns of around 9% over last one year.
“Partial withdrawal in case of fixed deposits is difficult. Also, in case of partial withdrawal, there is always a penalty imposed on the depositor. Furthermore, the interest earnings on fixed deposits are liable to taxation,” Grover said. Even the interest is calculated after the entire month is completed in case of fixed deposits, he added.
This makes a case for investing in short-term debt mutual funds which generate higher returns than FDs along with higher liquidity.
Talking on the present scenario of surging bond yields, analysts said though higher bond yield will result in lower returns for long-term debt fund products, returns from short-term debt funds are likely to be higher.
“With rising retail inflation, RBI is unlikely to reduce rates in the first half of the year. This is good news for bank fixed deposits as interest rates will not be reduced further by banks. However, compared to returns of short-term debt funds, overall deposit rates on FDs will remain lower,” Grover said.