Difference Between Fixed Deposits & Debt Funds

Posted on Monday, January 27th, 2025 | By IndusInd Bank

If you are looking for conservative investment options, two options you may want to consider are fixed deposits (FDs) and debt funds. While the former is safe from market fluctuations, the latter is market-linked. However, both are considered low-risk products, which makes them solid contenders for a conservative investment portfolio.

If you are wondering where to park your funds – debt funds or fixed deposit – we have curated just the guide to help you.

What are Fixed Deposits?

Let’s start with a brief overview of fixed deposits.

• A fixed deposit is a savings instrument offered by banks and financial institutions. Here, you invest a lump sum for a specific period at a predetermined interest rate. The tenure options are flexible in a fixed deposit account. 

• The interest earned on an FD is guaranteed. This makes it one of the safest investment options available.

• Whether you are looking for short-term savings or long-term security, FDs are ideal for risk-averse investors.

For an easy way to calculate returns, you can use the FD calculator. This gives you an estimate of your final maturity amount based on the interest rate and tenure.

What are Debt Funds?

To understand the comparison between debt mutual funds vs FD, let’s also get a brief overview of debt funds.

• Debt funds are a type of mutual fund that invests in fixed-income securities. This can include government bonds, corporate bonds, and money market instruments.

• The returns from debt funds are market-linked. They are subject to fluctuations based on interest rates and market conditions.

• Debt funds offer the potential for higher returns, especially during periods of falling interest rates. However, they carry some level of risk.

• Debt funds are suited for those with a slightly higher risk tolerance within the low-risk spectrum. 

If you are still wondering ‘Are debt funds better than FD or is the latter the more suitable option for me?’, we have listed the differences between the two. 

Comparing Fixed Deposits and Debt Funds

Let’s compare the two across key parameters:

What to Look for When Choosing Between FD and Debt Funds

In the debate of FD vs debt funds, here are some points to consider when choosing between both:

1. Risk Appetite

If your risk appetite is low, consider opting for FDs as debt funds carry some risk due to market fluctuations. Choose based on your tolerance for risk.

2. Investment Horizon

If you have a short to medium-term goal, FDs are better suited for you. Debt funds are ideal for both short and long-term investments.

3. Liquidity Needs

If you think you will need funds soon, consider debt funds as FDs usually have a lock-in period. Premature withdrawal for FDs is subject to penalties. 

4. Returns

One of the benefits of fixed deposit is that it provides fixed returns. On the other hand, debt funds offer the potential for higher returns depending on market conditions, but with no guarantee.

5. Financial Goals

When comparing FD vs debt funds, a major point should be your financial goals. If you seek predictable income, go for FDs. But, if you are willing to accept some risk for potentially higher returns, opt for debt funds.

Also Read: Tax Planning with Fixed Deposits- A Comprehensive Guide

Conclusion

When it comes to deciding between a debt fund or a fixed deposit, the choice depends to a large extent on your financial goals and risk tolerance. While debt funds offer higher return potential and flexibility, fixed deposits provide guaranteed returns and safety.

If you are looking for a stable, risk-free investment, an FD is likely the best option for you. Ready to secure your investment right away with guaranteed returns, high interest rates, auto-renewal options, and more?

Open a Fixed Deposit account with IndusInd Bank today! 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.