Request received - loud & clear!
Returning you to where you were...
If you have a sizeable amount of money saved up and your primary investment goals are:
Then you have two widely popular investment options open to you – Fixed Deposits and Debt Mutual Funds (Debt Mfs).These are both investments that meet the above criteria, and have their own features which distinguish themselves from each other. The differences in the way these two investments work can be seen as advantages or disadvantages depending on the type of investor you are.
To answer this question, one must consider the following points, and evaluate the type of investor he or she is:
Rating | Typically issued by: | Safety Level |
---|---|---|
"Sovereign" |
The Government of India. |
Highest – no investment is safer than a "sovereign" investment. |
"AAA" |
Banks, large private companies and PSUs. |
Very high – there is little likelihood that your investment will do badly. |
"AA" |
Private companies. |
High – these are tried and tested investments and consistently perform well. |
"BBB" |
Private companies. |
Below average – you stand a very realistic chance of losing your capital. |
"BB", "B", "C" and lower |
Private companies. |
Poor – you will almost definitely lose your invested capital and have probably fallen victim to empty promises of huge returns. |
If you’re the kind of investor who has a high risk appetite and can afford to wager your savings – for a potentially huge benefit – but against staggering odds in an unstable financial market that’s littered with scams, then try your hand at debt mutual funds. You might get lucky.
If you’re the kind of investor who falls in the majority category of those who wish to take a highly informed decision to invest hard earned capital in an established avenue of investment, which has a safety rating and is guaranteed up to Rs.1,00,000 – invest in fixed deposits.
If you feel that you will need to break your investment before it reaches maturity and liquefy funds at short notice, then invest in debt mutual funds. But bear in mind that you will never receive the full benefit from any form of investment if you habitually break investments.
If your investment pattern involves allowing all your well-planned and premeditated investments to fully reach maturity – and make full use of the huge maturity benefits – then invest in fixed deposits. Once an investment has been made, it is assumed that enough precautions and measures have been taken to allow for full returns.
Keep in mind that any investment, if withdrawn halfway through, will never pay out as much as you had hoped.
If you are the type of investor who no desire to know what the end result of the investment will be, or wishes to take the chance at perhaps earning more due to fluctuations in the market which could raise the rate of returns – then invest in debt mutual funds. These funds do not earn interest, but earn dividends which could go higher or lower than you anticipate. Historical performance data, however, does not support the notion that returns will be high.
If your idea of investment is to have full knowledge and awareness of exactly how much you’re investing, and how much you expect to receive as profitable returns, then invest in fixed deposits. These will give you a real picture of what to expect, and when to expect it. It also facilitates better financial planning, as you will already know how much the maturity amount is and how much you’ll be earning at the end of the term.
To understand the different taxes that apply on these investments, it’s important to understand the kind of return on investment they offer. Fixed deposits offer you return on investment in the form of interest, and Debt Mutual Funds offer return on investment in the form of capital appreciation or dividend. These two heads of income are taxed differently.
The reason that capital gains and dividend are taxed at a lower rate than interest income is because it is unsecured and a certain element of risk exists – bringing with it ambiguity about whether the investment will yield a profit or not. This risk is balanced by lower taxation, but leaves the investor open to the possibility of losing his investment. Interest income is taxed because it is a definite source of income which has been promised to the investor and has been secured up to Rs.1,00,000. A little taxation is a small price to pay for an investment that will almost certainly yield a profit and returns.
If your investment strategy aims at saving on a little tax at the cost of exposing yourself to risk, invest in debt mutual funds.
If your investment strategy aims at secured and guaranteed returns on investment from a high rated scheme, invest in fixed deposits.
Overall, it should be noted that fixed deposits are the investment of choice for the majority of people who have investable amounts of savings, as it is a safer and more secure investment where funds are locked until they mature. It is ideal for those looking to park their funds and earn a decent amount of interest and benefits. Economic fluctuations do not affect the rate at which interest will accrue, as it is decided beforehand.
Debt mutual funds, on the other hand, are investments which are less secure and can fail due to multiple reasons not limited to fluctuations in the economy. These investments are for those who can afford the risk in order to enjoy the slightly higher reward (when compared to fixed deposits). The primary advantages here are that you can liquefy your investment fast and at minimal cost, and can save on tax – at the cost of a risky investment platform.
Display of any trademarks, tradenames, logos and other subject matters of intellectual property belong to their respective intellectual property owners. Display of such IP along with the related product information does not imply BankBazaar's partnership with the owner of the Intellectual Property or issuer/manufacturer of such products.
Gain an edge by connecting with us via email. We promise never to spam you.
Request received - loud & clear!
Returning you to where you were...
Psst... We'll ensure you're the very first to know the moment rates change.
We'll email you immediately! You snooze, you lose.