DEBT FUNDS OR FIXED DEPOSIT

INTRODUCTION : Every month when your salary is credited then you keep some part of that salary as savings. You keep some money for your later use, may be for emergency or if you want to be the house, or car and you save for that. So what are the ways to save . One simple way is that you keep your salary as it is in the bank and it gets collected . It's very bad way because such a money loses their value due to rise and fall of inflation in the country and due to that the price of the commodities are increasing too . So , the value of your money keeps decreasing every year by 4-5 % according to the Inflation rate .

          People invest the money so that they don't lose their value kept just lying. There are different places to invest like saving account , fixed deposits, gold and jewellery and real estate. Some people who want to take more risks then they Invest in the stock market of the country . Every Investment has 3 main things :

1. RETURN - means how much % of profit are you earning through the investment. 

2. RISKS -  means how risky it is to invest, what is the chance of losing all your money in that investment. What is the chances of going in loss after investing there.

3. TIME - means how much time you are investing your money. So the basis risk here is that if the time is more, risk is more then the returns will also be more. 

MEANING OF DEBT FUNDS : Debt funds are mutual funds that invest in fixed Income securities like bonds and Treasury bills. Gilt fund, monthly income , short term plans, liquid funds and fixed maturity plans are some of the investment options in debt funds. Apart from these categories, debt funds include various funds investing in short term , medium term and long term bonds. 

       Debt funds is made up of two words debt and funds. The word debt means the loan and the fund is mean here the collected sum of money to paid. Debt fund is also known as bond funds or fixed Income funds. Debt funds is a mutual fund that invests in bonds or other debt securities. A debt funds invests significant portion of your money in fixed income securities like government securities, debentures, corporate bonds and other money market instruments. The debt mutual fund lower the risk factor by investing in such instrument. Debt funds are relatively stable investment and helps in generating a wealth.

TYPES OF DEBT FUND :

1. LIQUID FUNDS

2. DYNAMIC FUNDS

3. MEDIUM SHORT TERM GILT FUNDS

4. LONG TERM GILT FUNDS

5. INCOME FUNDS

6. CREDIT OPPORTUNITY 

7. ULTRA SHORT TERM FUNDS

MEANING OF FIXED DEPOSITS : Fixed deposits is a financial instrument provided by banks which provides investors a higher rate of interest than a regular saving account until the given maturity period. FD is one of the safest instrument avenue . FD is also less risk option but it has a time limit before that we cannot take the money out . And if we want to take the money from FD then we have to break the FD and pay the penalty of it to the lender. The return in fixed deposits is also a bit somewhat 6-7% .

      DEBT FUND VS FIXED DEPOSITS

Debt funds and fixed deposits both are used for long term investment and have hight rate of return in investment. Debt funds and fixed deposits both are treated as safety instrument for long term investment. Besides these similarities they are differs in various aspects :

1. TAX EFFICIENCY:  In debt funds, many people invest money for the prime reason of reducing their annual tax . you pay tax only in the year you redeem and not before that. Debt funds are more tax efficient than traditional investment options like fixed deposits (FDs). In Fixed deposits, the interest you earn every year from the investment is taxable according to the INCOME TAX ACT 1964.  After charging the tax on your investment then he paid the money so collected from the investment.

2. HIGHER LIQUIDITY : In fixed deposits , if you break the fixed deposit before the completion of your maturity period , the bank may charge you a penalty. While in debt mutual funds have no lack in periods debt mutual funds are liquid and you can withdraw your money from the fund on any business day.

3. FLEXIBILITY : Debt mutual funds also offer you the option of moving your money to different funds. Thus is possible through a systematic transfer plan (STP) . Here you , have option to invest a lump sum amount in debt fund and systematically transfer a small portion of the fund into equity at regular intervals. Other traditional investment options do not offer this degree of flexibility to investors.

4. RATE OF RETURN: Debt funds provide you a more rate of return in comparison to fixed deposit in the banks . Therefore this is one more reason people prefers to invest in debt funds rather than investing in fixed deposits.

5. CONVENIENT :  Debt funds is more convenient than fixed deposit as it is open from many places like from the MUTUAL FUND HOUSE, THROUGH ONLINE , BANKS , ADVISORS , DISTRIBUTORS ETC. 

     FOR EXAMPLE : Suppose you have 5 lakh rupees and you want to invest in bank fixed deposit and in debt funds .

BANK FIXED DEPOSIT : 

        INTEREST - 5-6%

        RETURN -  95,000

        TIME - 3 YEARS

DEBT FUNDS : 

        INTEREST - 7-8% 

         RETURN - 1,21,000

        TIME - 3 YEARS.

INDEXATION BENEFITS : Debt funds enjoys a indexation benefits in investment let's we explain it with an example ; suppose you have 100000 rupees and investing in bank fixed deposit and in debt fund see below ;

Bank fixed deposits :

        Investment - 100000

        Time - 3 years 

        Interest - 7.5 %

        Return - 1,24,230

      Inflation rate - 5%

 Debt funds :

     Investment - 100000

     Time - 3 years 

     Interest - 7.5 %

     Return - 1,24,230

   Inflation rate - 5%

AFTER THE 3 YEARS , INDEXATION BENEFITS WILL BE ;

      INDEXATION = RETURN - INFLATION

Bank fixed deposit :

      Index cost = NA

     Benefit = 24,230

   Taxable gain = 1,24,230 - 100000

                           = 24,230

     Tax rate = 30%

DEBT FUNDS :

      Index cost = 1,15,763

      Benefits = 24,230

     Taxable gain = 1,24,230 - 1,15,763

                             = 8,467

        Tax rate = 20%