Dhirendra Kumar talks about the pros and cons of debt funds over the conventional fixed deposits
Are long duration and medium duration debt funds better and safe than a bank fixed deposit? Should one invest in them?
- Kiran Shah
No, the safety of bank deposits cannot be matched by a debt fund. That's because the real charm of a deposit is that you get an almost guaranteed return. Of course, I can no longer say that it is guaranteed because some banks have defaulted on giving investor's money on time. But as compared to fixed deposits, debt funds don't make you any promise. No mutual fund can make a promise of return. You will likely get a more stable return without losing money, but not with medium or long-duration funds. Some funds never go down in value, for example, overnight funds, but you don't get more return than you get in a savings bank account. Thus, I would say that ultra-short-term and short-term funds will be able to match or somewhat earn you a little more return than fixed deposits. But I don't think they can match deposits for a very short investment period on the safety front. While debt funds can sometimes go down in value, I think over 2-4 years, the kind of term for which you make a deposit, you will make little more return with debt funds.
Apart from that, there is also a difference in the tax that you are liable to pay on fixed deposits and debt funds. You are responsible for paying taxes on the interest income from your deposits every year, irrespective of even if it's a cumulative deposit. However, with debt funds, you are not liable to pay any tax till you realise it. Moreover, if you hold your debt funds for more than three years, you are supposed to pay capital gains tax on the appreciation after indexation, making it a very tax-efficient vehicle. Thus, deferring taxes and indexation benefits can help you earn better post-tax returns with debt mutual funds.