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Are small finance bank deposits safer than debt mutual funds?

Dhirendra Kumar explains which is a better alternative between the two

Which is a safer option between small finance bank deposits and debt mutual funds?
- Ankit Jain

Both are reasonably safe. But I would say that debt mutual funds are relatively safer because you get the benefit of diversification. Having said that, it does not mean that the deposit in a small finance bank is risky. RBI has a very close supervision mechanism for them, and they get a license only if they are safe. They are relatively new banks and have a reputation to build, so I don't think they are unsafe. But here is why I think debt mutual funds are far better.

If you invest Rs 1 lakh in a debt fund, it will be spread over 30 debt instruments, and even if one of them goes wrong, it will be perhaps 5-7 per cent of the total portfolio. So all your money is not at stake. Besides this, there are tax benefits if the holding period is more than three years, as it is treated as long-term capital gains with indexation benefits. Also, when it comes to liquidity, debt funds offer a great degree of convenience. Whenever you decide to withdraw money, it gets credited to your bank account within two days. However, one big difference between a deposit and a debt fund is the assurity of returns beforehand, which is lacking in the latter case.

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