scorecardresearchDebt funds or fixed deposits: Which one is better investment choice?

Debt funds or fixed deposits: Which one is better investment choice?

Updated: 24 Dec 2022, 11:10 AM IST

In this downtrend of the stock market, you must be preferring to protect your capital if you are a short-term investor. In this article, we will explain a comparison between debt funds and bank FDs.

Interest rates for fixed deposits have been rising for quite some time now amid rising repo rate cycle of RBI

Interest rates for fixed deposits have been rising for quite some time now amid rising repo rate cycle of RBI

Since inflation is hitting its highs and your portfolio is hitting its lows, you must have been thinking about shifting investment from stocks to fixed-income securities, in which your capital must be protected.

When you talk about fixed-income securities, there are majorly two options, debt funds, which invest in corporate bonds of the companies or government bonds, and bank FDs which confuse you the most. It is necessary to establish a clear distinction between both of them to make informed investment decisions.

Below mentioned points are a few differentiating points that help you in clarifying your doubts.


A significant part of your personal finance that majorly affects your net returns is tax. In the case of debt funds, tax authorities charge you according to the capital gain you have earned. In the case of long-term capital gain, a 20% tax would be levied when you sell your securities after 36 months. In the case of short-term capital gain, selling securities before 36 months from the date of buying, you have to pay tax according to your slab rate.

On the contrary, in the case of FDs 10% TDS will be deducted if interest exceeds 40,000 for the year (individual) and such a limit would exceed if you are a senior citizen to 50,000.


Bank FDs are not liquid enough to withdraw anytime you want, as withdrawing premature FDs would lead you to charge a penalty. While in the case of debt funds, you can withdraw anytime you want without any exit load as they are open-ended schemes.


In comparison to bank FDs, debt funds yield higher returns. Bank FDs are generally providing 5-7% of the amount invested, but debt funds yield 9-10% of the amount invested, depending on the type of funds you have invested in.

Indexation benefits

There is no provision for giving indexation benefits while calculating tax at the time of withdrawing your FDs. On the contrary, in the case of debt funds, you will have the benefits of indexation. In indexation, the amount of purchase price of the security will be increased at the rate of prevailing inflation rate in the country. It helps you in reducing your tax liability.

Bank’s new demand for tax relief

Banks are demanding tax relief for individuals exempting FD investments up to 5 lakhs. It will help banks gain traction with the individuals investing in FD rather than corporate bonds and debt funds, directly or indirectly.

If such a demand is accepted by the income tax authorities, you will be able to reduce more tax than today, which might impact your investment decisions.

While making any investment decisions, keep yourselves updated with the new norms of the tax authorities and governments. It will help you in making financial decisions effectively and take out the best utilisation of your investible resources.

Anushka Trivedi is a freelance financial content writer. She can be reached at

We explain what are short term debt funds
First Published: 24 Dec 2022, 11:10 AM IST