DEBT FUNDS VS FIXED DEPOSITS: WHICH ONE SHOULD YOU CHOOSE FOR 2-3 YEARS INVESTMENT?

Debt Fund Vs Fixed Deposit: While FDs have long been a trusted investment option, there are now many options that potentially offer higher returns than FDs. If you dare to take a little risk and want to invest money for two to three years, you should consider debt funds. Compared to FDs, debt funds are considered the safest mutual fund option and can offer much higher returns. Understand its benefits, advantages and other important information.

Debt Fund: What is it?

Bonds, government securities, treasury bills, non-convertible debentures and other fixed-income instruments are among the investments that investors' money makes in debt funds. In other words, debt funds are invested in a safe place. Compared to equities, debt funds are considered safer. Also, there is no liquidity issue, which means you can withdraw your money whenever you want. Debt funds often have a fixed maturity date.

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Capable of giving higher returns than FDs

From a financial perspective, debt funds can give slightly higher returns than FDs. On FDs with a tenure of one to three years, you often get an interest rate of 6 to 7 or 7.5 percent. However, returns on debt are considered to be around 9%. In such a situation, investing in debt funds can increase your profits. However, investors should not expect large profits, as shares in debt funds do.

Tax rules on debt funds and FDs

Talking about taxes, there is a section on taxing profits from debt funds. The income tax slab determines how much of the total profit from a debt mutual fund is taxed. This will depend on whether you bought the fund before April 2023 or after. If you bought the fund before April 2023, the previous rules will apply. If you bought the fund on or after April 2023, your profits will be taxed as per your income tax bracket.

Short-term capital gains (STCG) are taxed as per the investor's income slab if held for less than three years. Long-term capital gains (LTCG) are taxed at 20% with indexation if held for more than three years. However, when it comes to FDs, 5-year FDs are tax-free. FDs held for a period less than this attract income tax.

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Disclaimer: Investment in mutual fund is subject to market risk, please do take expert opinion before investing.