FD vs Debt Mutual Funds

In India FDs are one of the most popular choice for investing. But are they the ‘best’ investment option?
Below is a comparison of Fixed deposit vs debt mutual funds which are comparable to FDs on the risk profile.

Fixed DepositsDebt Mutual Funds
Tax Implication: Interest income on FD is taxable as per your personal income tax slab. For Eg. If your annual income is more than Rs. 10 lakhs in a FY you are liable to pay tax @30% on income earned. Tax is deducted at source if interest income exceeds Rs.10,000Tax Efficiency: No tax is to be paid by investors for dividends distributed by mutual funds. If you fall in the highest tax bracket Liquid funds are the best alternative in terms of post-tax returns.
Penalty on withdrawal: Premature withdrawal of FD comes with a penalty. For Eg SBI charges 0.5% on the applicable FD interest rate on withdrawal before maturityEasy Withdrawal: In case of emergencies money can be easily withdrawn from open ended debt schemes. You can avail SWP for withdrawal.
Interest rate movement: Due to the ever changing economic conditions interest rates fluctuate. A 5 year FD with 7% interest rate will generate constant returns even though interest rates are going up.Interest rate movement: Debt fund managers can take advantage from rise and fall in interest rates.
Inflation’s cut: Inflation is taking a huge cut on your interest income. For Eg. Inflation rate is 8% and your FD is giving you same interest rate of 8% then you are actually eroding your wealth.Beats Inflation: Indexation is applicable on debt funds taxation. Inflation is adjusted against the gains on investment in debt funds if held for more than 3 years.

Always choose the best investment option and by looking at the table above you can easily conclude which is the best option to invest in!

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