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Which is a best Investment option – Debt Mutual Fund or Fixed Deposit?

With the rising interest rates, there is always a question strikes the investors mind that investing in debt mutual fund or Fixed deposit is a best option?

This is a working to show how Debt Mutual Funds beat fixed deposits post tax.

(A debt fund is an investment pool, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons)

When you invest in an FD, you pay tax at your tax slab which could be 30% (Which i assuming and all my investors are in )

However investors in Debt Mutual funds get the benefit of indexing the cost and a reduced rate of 20% tax which significantly reduces tax burden.

Assumptions in the sample below:

  1. Investment has to be for 3 years for indexation benefits for Debt Mutual fund
  2. Cost inflation index growth at 5% which is very reasonable considering the rate of inflation
  3. Assuming the returns are at 7.25% returns for both fixed Deposits and Mutual Funds

 

Even with the same returns, the net gain at the end of 3 years is substantial if one had invested in bond funds

Mutual Fund investments are subject to market risk. Please read all scheme related documents carefully.

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