Increasing the appeal of bank fixed deposits by a notch, SBI has increased FD interest rates by 75 basis points. However, the decision to switch from debt mutual funds to FDs depends on your investment goals and risk appetite and investors should not be in a hurry to shift, according to experts.
“FDs offer guaranteed, fixed returns, providing a predictable income stream which is particularly attractive in volatile markets. They are generally safer, being less affected by market fluctuations and covered by deposit insurance up to Rs 5 lakh. However, debt mutual funds offer potential benefits that FDs do not, such as higher returns in favorable market conditions and tax advantages on long-term investments. Therefore, the choice should align with your specific financial objectives and risk tolerance,” said Chakravarthy V., Cofounder and Director, Prime Wealth Finserv.
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“Fixed deposits are fine if the debt mutual fund investor is looking for fixed interest without even short-term volatility. It is expected that eventually, the interest rate will decline with lowering inflation and a stable Government. The investor can lock in at current rates. However, investors should map the funds’ requirements with the maturity period carefully,” recommends Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance.
SBI FD interest rates
SBI has increased the fixed deposit rates by 75 basis points for deposits maturing between 46 days and 179 days from 4.75% to 5.50%. The bank increased the interest rate for the tenure of 180 days to 210 days by 25 bps from 5.75 % to 6%. The bank has also increased the FD rates by 25 bps for tenure of 211 days to less than 1 year from 6% to 6.25%.
FD vs debt mutual funds
When comparing fixed deposits and debt mutual funds, it’s evident that fixed deposits are considered low-risk investments. They offer guaranteed returns over a predetermined period, while debt mutual funds carry a slightly higher risk due to interest rate fluctuations.
Another key difference lies in taxation. Investments in tax-saving fixed deposits are exempt under Section 80C of the Income Tax Act. On the other hand, debt mutual funds lack such exemptions. Following the amendments to the Finance Bill 2023, debt mutual funds are taxed according to the individual’s income tax slab rate.
Fixed deposits are also taxed based on the individual tax slab rate. However, each time a fixed deposit matures and is renewed, TDS is deducted.
In contrast, with debt mutual funds, there is no TDS deducted. The tax is paid only when an investor redeems the units.
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Despite these differences, both fixed deposits and debt mutual funds fall under the same asset class, providing investors with varied options depending on their risk appetite and tax considerations.
Are you considering investing in debt mutual funds at this time? What portion of your portfolio should you allocate, and what strategy should you adopt?
“Short-term money requirements (less than three-year maturity) and emergency fund money can be combined with fixed deposits and debt mutual funds. Emergency can happen even on weekends wherein debt fund redemption will not be possible and that’s where a fixed deposit opened online will be handy. As it can be closed prematurely (but with a penalty) and then money can be withdrawn from an ATM,” recommends Minocha.
“To maintain a balanced portfolio, it’s essential to diversify investments between fixed deposits (FDs) and debt mutual funds. This strategy balances the safety and guaranteed returns of FDs with the potential for higher returns from debt mutual funds. For short-term goals, FDs are preferable due to their fixed returns, while debt mutual funds are better suited for medium to long-term goals to capitalize on potential higher returns,” said Cofounder and Director, Prime Wealth Finserv.
He also recommends, “Considering liquidity needs is crucial, as FDs often incur penalties for early withdrawals, whereas debt mutual funds offer greater liquidity. The suggested allocation varies based on risk tolerance: conservative investors might allocate 60-70% to FDs and 30-40% to debt mutual funds; moderate investors might prefer a 40-50% allocation to FDs and 50-60% to debt mutual funds; and aggressive investors could allocate 20-30% to FDs and 70-80% to debt mutual funds.
ETMutualFunds recently analyzed the performance of gilt funds. According to SEBI regulations, these funds must allocate 80% of their corpus into government securities, making them a generally safer investment option.
In the last three years, gilt funds have offered an average return of 5%. ICICI Pru Gilt Fund and SBI Magnum Gilt Fund gave 5.93% return each in the last three years. In the last five years, gilt funds gave an average return of 6.41%. ICICI Pru Gilt Fund offered the highest return of 7.57%, followed by DSP Gilt Fund which gave 7.52% return in the last five years.
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Are you intrigued by the performance of debt mutual funds? What is the outlook for these funds?
“Rising interest rates can negatively impact the NAV of debt mutual funds in the short term, but higher yield issuances may benefit these funds in the long run. Historically, debt mutual funds have outperformed FDs over similar maturities, making them a viable choice for long-term investments despite higher risks. Additionally, debt mutual funds offer better tax efficiency on long-term capital gains compared to FDs, especially for those in higher tax brackets. While FDs provide safety and guaranteed returns, a diversified approach tailored to financial goals and risk tolerance is recommended for optimal benefits,” said Chakravarthy V.
“The 10-year bond yields dropped below 7% last month. After the new Government swearing-in, it is expected that there will be political stability and inflation will also be kept under check. There is a high possibility of a reduction in interest rates in future. Investors with a long-term horizon can invest in long-tenure debt funds, but those with a short-term horizon should remain invested only in liquid, ultra-short and money market mutual funds,” said Rajesh Minocha.
One should always consider risk appetite, investment horizon, and goal before making investment decisions.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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