Bank fixed deposits have been the savings instrument of choice for decades. Known for being the safest investment avenue, bank fixed deposits offer the comfort of principal protection and guaranteed interest. Nothing is market linked in terms of original investment and interest. So, once you open an FD, you are reasonably sure of the capital coming back to you along with the promised rate of interest, provided the bank itself does not fail It is a simple yet effective way for conservative savers to generate returns. With FDs, it is possible for you to get pre-tax returns in the range of 7%. This is why savers of yesteryears and even a large population today still prefer fixed deposits. Check out fixed deposit options at Standard Chartered here.
There are no guarantees in debt funds. Returns are market-linked. The debt fund investor is fully exposed to defaults or any other credit defaults by the companies whose debt securities are being invested in. In practice, debt funds carry more risk than FDs. But, debt funds have advantages of their own. Firstly, debt funds score on taxation if they are held for more than 36 months. Indexation can reduce the taxes from 20% level to much lower. In the case of bank FDs, interest income is added to normal income and taxed at your slab. So, for those in higher tax slabs, debt funds are tax efficient. Two, debt funds have the potential to give better returns as compared to than bank FDs. The higher returns are as a result of debt funds taking higher risk. Want debt fund ideas? Check out Standard Chartered’s Online Mutual Funds platform.
Even if you earn good interest rates with bank Fixed Deposits, there are some issues that you have to deal with.
Firstly, there is TDS or Tax Deducted at Source in case of FDs. Usually, banks deduct TDS on interest income from fixed deposits when interest from one FD or sum of all FDs with the bank is more than the threshold amount of Rs 10,000 in a year. On the other hand, there is no TDS on debt mutual funds. To make your FD of your choice with Standard Chartered, click here.
Two, bank FDs proceeds are available at 1-2 days notice. If you close the FD online, sometimes the money can come in the next few hours or they can take 24 hours too. If you withdraw an FD before its maturity, there could be a penalty as well. In the case of some debt funds like liquid schemes, money can be instantly withdrawn online, usually in minutes. They can also take a period of 2-3 working days. Some debt funds carry an exit load, which is a charge the investor has to pay in case they redeem their investment before a stipulated time. However, most liquid funds have no exit loads.
Despite debt funds being largely managed well, debt funds are vulnerable to both credit risk and interest rate risk, returns can drop and be negative, at least in the short term. This has happened on more than one occasion. So, debt fund investors should be prepared to face the prospect of poor returns if the selection of investments in the fund is not good.
But, debt funds can generate far superior returns, especially when adjusted for taxes. If you need help in buying debt funds, start an investment relationship with Standard Chartered now. You will need a Standard Chartered savings account, an investment account and a valid investment profile before you can start investing., You can also view fund ideas in line with your risk profile. In the alternative, if you are clear on the fund you want to purchase and understand the risk and returns, you can purchase the fund of your choice using Online Mutual Funds.
Like all age-old arguments, you have not heard the end of the bank FD versus debt funds battle. There are pros and cons on both sides. For investors and savers, it is best to build a fixed income portfolio by having a good allocation to both FDs and debt funds, instead of choosing one against the other. When combined, FDs and debt funds cancel out each others’ weakness and give you a stronger portfolio both in terms of returns and stability.
