Why invest in Debt Funds?

Mutual funds are categorized into three types:  equity funds, hybrid funds and debt funds in descending order of their risks associated respectively. Debt funds are the closest which comes to the conventional FDs in terms of risk.

A debt fund’s main goal is to give investors a steady income after the maturity period, and you must choose a time horizon in line with that of the fund.

You can find out about various debt funds and their duration directly from the fund houses or online or through a third-party. This will help investors understand a fund’s performance with respect to interest and return rates, which makes it easier for you to avoid market volatility by making informed decisions.

Debt Funds vs Fixed Deposits

Let’s have a detailed look at the differences between fixed deposits and debt funds. The table below helps you decide which investment is suitable for you.

 

Particulars Debt Funds Fixed Deposits
Rate of returns 14-18% 6-8%
Dividend Option Yes No
Risk Moderate Low
Liquidity High Low
Investment Option Can choose either an SIP investment or a lumpsum investment Can only opt for a lumpsum investment
Early Withdrawal Allowed with or without exit load depending on the mutual fund type A penalty is levied to withdraw prematurely
Investment Expenditure An expense ratio of 2.5% is charged No management costs

Banks offer a pre-set interest rate for fixed deposits based on the tenure chosen. Debt fund returns are solely dependent on the market movement – they have historically earned higher returns (sometimes even more than double) in the form of capital appreciation on top of interest.

One good thing about fixed deposit is, market highs and lows will not impact the returns you earn. So typically, debt funds outdo fixed deposits by a huge margin during market highs and slightly underscore FDs when the market is down.

 

 

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