- Successive rate cuts by the Reserve Bank of India (RBI) have made the investment environment competitive for fixed deposits and debt funds. Investors must carefully examine their return on investment (ROI) before choosing between the two alternatives.
- Whether its corporate fixed deposits or individual fixed deposits, both are emerging as a better alternative to debt funds as the tax advantage of debt fund goes away as for a holding period of fewer than three years, debt funds do not enjoy tax advantage.
- Investors who want flexibility and liquidity should invest in debt funds and others should go for FDs if they want to park their money in the bank safely for a longer period.
- Debt funds held for longer than three years are taxed at 20% with indexation on capital gains. This works out to be a lower rate than FDs for those taxpayers in the highest slab rate. So one should adopt a cautious approach while deciding between FD and debt fund investment.
- Investors generally consider investing in fixed deposits to be the most convenient option as it is safe and offers fixed returns. Before making a final decision to invest in debt funds or fixed deposits, one should go through a detailed comparison of these investments.
- The yield differential between debt funds and a fixed deposit can be determined considering their returns in the last one year. Taxation also plays an important role in determining the returns of the debt funds and fixed deposits.
