Debt Mutual Funds vs Fixed Deposits: Are debt funds a better choice for higher returns and early withdrawal?

Fixed Deposits are safer investment options compared to debt mutual funds. FDs also offer fixed rates of return. On the other hand, debt mutual funds offer higher return, but they are subject to market volatility.

Mutual Funds have gained popularity among investors who are looking for alternatives to equity markets.

Debt Mutual Funds (DMFs) and Bank Fixed Deposits (FDs) are among the few popular investment options for the investors who are looking for higher returns. Fixed Deposits have traditionally remained a preferred choice among investors due to their secure nature and flexibility. On the other hand, debt mutual funds are gaining popularity as they offer higher returns despite the market exposure. The investors, who are looking for moderate risk investment options, are going for debt mutual funds.

However, choosing a debt mutual fund or fixed deposit should depend on your financial goal, risk appetite and investment horizon.

Debt Mutual Fund benefits

Debt mutual funds are those mutual fund schemes which invest in fixed income instruments like corporate and Government bonds, corporate debt securities, and money market instruments, among others. The debt funds come with a pre-decided maturity date and a fixed interest rate which helps buyers to earn upon maturity. Debt funds are less affected by the market fluctuations, compared to equity mutual funds.

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Fixed Deposits (FDs) Benefits

Fixed Deposits are a type of investment that is usually offered by banks or financial institutions with a fixed interest rate. The FD investments are made for a predetermined period and the interest rates remain unaffected throughout the investment period.

The FD investment tenures can range from three months to 5 years and even 10 years.

While FDs have traditionally remained a preferred choice of investment, debt funds are gaining popularity in recent years. The debt mutual funds offer higher return compared to FDs.

Let's take a look at why DMFs are a better alternative to FDs.

Debt Mutual Funds vs Fixed Deposits: Which one is better?

- Just like any other mutual fund, a Debt Mutual Fund also operates at a portfolio of securities which allows the investors to participate in a slightly higher interest-yielding segment than a bank FD.

- With the help of a good fund manager, one can receive a high level of safety on investment in debt funds. Many debt funds, which invest in AAA-rated securities, can offer higher returns.

- Debt funds come with a smaller lock-in period in comparison to bank FDs. In such a case, one can make an early withdrawal from their debt mutual fund investments.

- Though debt funds are subject to market fluctuation, with a positive market the debt funds can give higher return. On the other hand, the FD interest rate remains unchanged.

- FD interest rates are dependent on the tenure while in the case of debt funds the duration of the portfolio is in line with the scheme’s objective and returns may not necessarily be linked to the investment period.

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