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FD VS Mutual Funds: Learn What is Better Between FD & Mutual Funds

Products that yield fixed deposit are becoming less exciting day by day & hence investors are also looking at mutual funds as an option.

February 25, 2020 / 03:06 PM IST

With products that yield fixed returns, including fixed deposits (FDs), losing flavour, thanks to the slowdown and the churn in Indian as well as global economy, investors are looking for other avenues of income and are willing to consider products they have never tried before.

Identifying stocks and sectors to replace traditional products and investment modes is no easy task. Certain categories of mutual funds like liquid funds, hybrid funds, bond funds, short-term funds etc, with diversified portfolios and professional management could be good alternatives. These categories of mutual funds, which are basically for those taking a direct interest in mutual funds, do not get the same attention as equity mutual funds, which are now mostly the default option for the equity allocation in most retail portfolios.

Savings accounts vs liquid funds

If you are among those looking for a suitable vehicle to park and make a profit of money you don't for next seven days, or for a month or two, then liquid funds could be the best option. For instance, you have kept money in your savings account as you want to use them for your requirements in immediate future, or because you are yet to make up your mind on how to invest it. You aim easy accessibility and safety by parking money in SB account. However, holding large sums of money in savings accounts, which offer you interest rates as low as three to four per cent, for long periods, in itself is a lost opportunity. This is because, money that is being held for one to two months would have fetched you better returns at around 6.5 per cent (going by current trends), even while the safety and liquidity part is strictly managed as the Securities and Exchange Board of India (SEBI) guidelines stipulate. Even those who are new to mutual funds can go for liquid funds, like any other category of investors, as there is very minimal chance of any bad experience, be it with the returns or the management and access to your money.

Fixed deposits vs debt funds

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Now, if you are among those aiming at better savings than the interest you are getting from an SB account, you would have already shifted such money from SB account to Fixed Deposits (FD). However, if you look at the interests being offered by the banks currently, you will find them to be very low. For instance, the State Bank of India is offering an interest rate of six per cent on tenures ranging from three to 10 years, and if it is for a shorter tenure of just six months or so, it could be just five per cent. This is the lowest in the decade that the bank is offering. This is here where short-term debt funds come into play.

With better returns with lower credit and interest rate risks, short-duration funds, banking and PSU funds and corporate bond funds could be a better option for this above-mentioned category to invest.  Generating returns of over 9.5 per cent, short-duration funds that are well managed and mostly maintain a duration of two to three years can be a good replacement option for bank FDs. To offset the volatility part, you can match the period of investment with the duration of the fund. The Bharat Bond Exchange-traded Fund, with yields of 6.3 to 7.3 per cent for three year and 10-year variants respectively, is another product that can be a better option than FDs.
first published: Feb 25, 2020 03:05 pm

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