Are Debt Funds An Ideal Alternative To Bank FDs?

For decades, fixed deposits (FDs) have been the staple investment option of every Indian household. However, due to the rise of modern investment options, there is currently a decline in FDs and a precise shift towards debt mutual funds. Vardan Pandhare examines why debt mutual funds are superior to fixed deposits

- Vardan Pandhare

Every extra rupee, including bonuses and increments, was once guided towards bank fixed deposits (FDs). At some point during their lives, our grandparents and parents invested their money in FDs. It was the greatest way to earn extra interest while preserving the capital. What has changed then? In recent years, mutual funds have become more prominent. Due to this, FDs are no longer the most preferred long-term investment objective for many. Mutual funds were able to take advantage of the opportunity created by the 2016 demonetisation and the lower deposit return rates offered by FDs. Also, another trigger point which attracted investors towards mutual funds was the availability of tax-saving funds. One more crucial factor that turned the tide for fund houses and increased the trust for mutual funds as an investment avenue was the superlative digital and TV advertisement campaign. Sporting cricketing icons like Sachin Tendulkar and M S Dhoni churning out lines like “Mutual Fund Sahi Hai” surely created a buzz. And when among the plethora of offerings debt funds began giving more returns with liquidity, several low-risk investors decided to jump ship.

Deep Dive into Debt Funds

Debt funds are also mutual funds that invest in fixed-income securities like corporate bonds, treasury bills, government bonds, certificates of deposit, commercial papers, and other similar items. The characteristics of debt funds are:

■ There is a predetermined maturity date for the debt fund-based income instruments.

■ Market fluctuations have little impact on the returns of debt investments.

■ Debt securities are one of the options that are considered 'low risk.

■ Investors who participate in debt funds receive regular interest income as well as capital growth.