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Debt Instruments : Fixed Deposits Vs. Debt Mutual Fund – Explanation

What is a Debt Instrument
A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, debentures, certificates, mortgages, leases or other agreements between a lender and a borrower. These instruments provide a way for market participants to easily transfer the ownership of debt obligations from one party to another.

Fixed Deposits Vs. Debt Mutual Fund


There are different kinds of Debt Instruments available in India such as;
Below given are the important debt instruments available in India

  • Bonds
  • Certificates of Deposit
  • Commercial Papers
  • Debentures
  • FD
  • G – Secs (Government Securities)
  • National savings Certificate (NSC)
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Criteria for evaluation of instruments of investments in India

  • Capital  Protection (Safety)
  • Return on Investment (ROI)
  • Liquidity
  • Procedural Compliances
  • Tax Consequences

Firstly, let us a get a glimpse of how both instruments work.

Fixed Deposits:

Here a person invests a lump sum amount in a bank for a fixed rate of interest which he can get either monthly or together on maturity. Current rates of interest vary from 7% to 8% p.a.

Debt Mutual Fund:

In simple words Mutual Fund is an entity that collects money from multiple persons and will invest that money on their behalf in accordance with the pre-determined objectives. In a Debt Mutual Fund a person invests in a Debt scheme of a Mutual Fund which is collecting money from many persons and in turn invests in Debt instruments such as Debentures, Bonds, Commercial Papers, etc. of different corporates and investor can redeem his amount as per his wish. Here Professional Fund Managers are involved in investing money in debt instruments so that they achieve the target of diversification as well as reduce the risk. Here the rate of interest is not fixed to the investor. Here investment will be done at the price prevailing at the time of investing and that price keeps on increasing as time passes (as fund will earn interest) & redemption will be done at price prevailing at the time of redemption.

Now we will evaluate on the above 5 factors whether investment in Fixed Deposits is a better choice or Investment in Debt Mutual Funds is a better choice.

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Capital Protection: (Safety)

In case of investment in Fixed Deposits Capital is insured upto an amount of Rs. 1,00,000 by Deposit Insurance Credit Guarantee Corporation and after Rs.1,00,000 also Principal is well protected.

In case of Debt Mutual Fund there is generally high safety of Principal amount as our money is invested in more than 25 companies’ debt instruments and also in Companies which are rated above investment grade so here also your Principal amount is safe.

Hence, in this case, we can say that Fixed Deposits and Debt Mutual Funds are at par or Debt mutual Funds are more safe than Fixed Deposits due to Diversification (investment by Mutual Fund in many Companies.)

Return on Investment (ROI)

Rates on Fixed Deposits in the present Scenario are around 7.50% pre-tax and 6% post tax (assuming a conservative tax rate of 20%.)

Debt Mutual Funds also offer somewhere around 8% pre-tax and 8% post tax, if your holding period is 3 years or more because of indexation benefit on the same as it is a Long Term Capital Asset.

One should always compare post tax returns as that will lead true comparison between 2 instruments.

Thus, as aforesaid Debt Mutual Funds offer around 8% p.a. post tax return as compared to fixed deposits which offer only 6% post-tax return mainly due to Indexation benefit you get.(minimum holding period of 3 years.)


Fixed Deposits are highly liquid and can be pre-matured at any time in which case you may lose around 0.5 to 1% depending on amount of your investment.

Debt Mutual Fund which are Open Ended are also highly liquid but if you sell it before 3 years you will have to pay tax on the same.

Thus Fixed Deposits & Debt Mutual Fund (Open Ended) stand on the same footing liquidity wise.

Procedural Compliances:

Fixed Deposits are simple to operate. Even Debt Mutual Funds are simple to operate but before investing in Debt Mutual Fund it is advisable to see that you invest in a good Mutual Fund Company with an established track record. After you identify a good Debt Mutual Fund you just have to fill a form by going to that Mutual Fund’s office and for redemption also, just a form is required to be filled.

Thus, ease of operation wise also Fixed Deposits and Debt Mutual Fund both are easy to operate.

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Tax Consequences:

Fixed Deposits: Tax on Fixed Deposits is to be paid as per your slabs i.e. at 10% if total income is upto Rs.5,00,000, @ 20% if total income is upto Rs. 10,00,000 and @ 30% if income exceeds 30%.

Debt Mutual Fund : Here Debt Mutual Fund is treated as a security (Non-Equity Fund), hence no interest but Capital Gain will be involved. If the security is sold within 3 years (i.e. holding period is less than 3 years, then it is treated as Short Term Capital gain which is payable at normal slab rates as seen in Fixed Deposits. But if they are held for 3 years or more, then indexation benefit will be available which technically will lead to tax free income from these Debt Funds.


If you want to invest upto 3 years, then Fixed Deposits and Debt Funds are at par.

If your intention to invest is 3 years or more, then definitely Debt Mutual Fund will rank much higher than Fixed Deposits (offers atleast 5% extra in 3 years period) because of indexation benefit that makes investment in Debt Funds (>3years holding) tax-free.

Table Showing Comparison of Fixed Deposits and Debt Mutual Fund

Criteria of Evaluation Fixed Deposits Debt Mutual Fund Preferred Option
 Capital  Protection Adequate More than adequate than F.D.’s due to Diversification. Any
 Return on Investment Around 6%(Post-tax) Around 8 %(Post Tax) if held for >= 3yrs Debt Mutual Fund if for >=3yrs and any if for short term
 Liquidity Fully Liquid Highly liquid if Open Ended Any
 Procedural Compliances Easy Easy Any
 Tax Consequences Taxed at normal Slab rates No tax due to indexation benefit if held for >= 3 yrs otherwise normal slab rates Debt Fund preferred if intended to hold with a 3 yr time horizon. If for Short Term than any can be selected

Key Takeaways:

Investment in Debt Mutual Fund will give you significantly higher post tax returns if your investment period is 3 years or more and also it offers safe investment place due to diversification in place which is lacking in Fixed Deposits. If your holding period is less than 3 years, Fixed Deposits or Debt Funds are at same level.


This document is for general guidance and informational purposes only, and does not constitute professional advice. You should not act upon the information contained in this communication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this communication, and, to the extent permitted by law, author accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it. The above is based on data and information in 2015-16 and present laws and regulations prevailing in India.

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