scorecardresearchFDs vs Debt funds: Which suits the best for short-term goals?

FDs vs Debt funds: Which suits the best for short-term goals?

Updated: 10 Jan 2023, 07:59 AM IST
TL;DR.

You cannot take risks if short-term goals are the case. We explain which investment suits better for your short-term objectives, debt funds, or FDs.

FDs vs Debt funds

FDs vs Debt funds

It’s the past decades our FDs have been passed from generation to generation. Investment means only two things for us when it must be your childhood, FDs if it is for the short-term, and real-estate, basically land, for the long-term. But now, after the Covid-19 outbreaks, when 1 crore demat accounts were added to Indian brokerage firms overall within a year, a mental shift has been seen in your investing patterns.

After the Covid-lead year, you must have also realised the importance of financial literacy when you do not have enough money as emergency funds, insurance to cope with health expenses, a drastic shift from keeping your money safe, and following a conventional approach to an assurance of a hedge against inflation. To achieve your short-term financial objectives, let’s understand more clearly which one suits you the best.

What are short-term financial objectives?

Any financial objective within a five-year window is known as a short-term goal. It might be buying a car, building an emergency corpus, or it could be a slight house renovation. To achieve them, you need a specific amount of money to save during the whole tenure.

Should you invest the saved money?

If we keep it in your savings bank account, it doesn't yield you more than 3%-5%. But, if you invest it in a particular financial instrument, you will be able to reach the targeted amount of money quickly and focus on other goals as well.

Should you invest it in FDs or debt funds?

When you invest for a short-term objective, you cannot afford to lose the principal amount at any cost, hence, the very first trait you will look for is the safest investment. Second is liquidity, there has to be a market where you can liquify your investments whenever you need them. 

Third and last, you must get a return on investment that at least hedges inflation if not appreciating the value. Now, let's understand how FDs and debt funds are fulfilling your requirements and which one suits you the best.

Returns

If you talk about returns, debt funds give two-sided returns, capital appreciation, and fixed-income as a percentage. However, the fixed interest rate is not so fixed as it depends on the overall movement of the interest rate in the country. Debt funds outperform FDs at times when the market is low. On the other hand, FD returns are pre-specified by the bank's offers typically between 6-8%.

Liquidity

The most important aspect of a short-term investment is that instruments must be highly liquid. In the case of FDs, you have to pay a penalty if you break it before maturity. But in the case of debt funds, you can sell it anytime through your AMC, many of them provide withdrawal without exit load as well.

Method of investment

You can choose a SIP for investing in debt funds if you do not have enough money to invest in lumpsum, which is the only option available with FDs.

Tax

Besides exit load, tax is the only expense you must care about. Up to the interest of 40,000 is exempted from FD investment. While in the case of debt funds, you have to pay capital gain tax on your investment, short-term capital gain in the current case.

By analysing the above-mentioned differentiation between FD and debt funds, you can say that if you are investing for a goal that does not have a specific time of withdrawal, say emergency funds, debt funds are the best option to avail. Otherwise, the choice might depend on your risk appetite and knowledge level primarily.

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

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First Published: 10 Jan 2023, 07:59 AM IST