Fixed Deposits (FD) are good
until you know Debt Funds (DF)
Calculate returns of DF and FD
- 10
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- 5
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Tax bracket
A tax
bracket refers to a
range of incomes
subject to a certain income tax
rate.
A tax bracket refers to a range of incomes
subject to a certain income tax rate.
Understand performance better with an illustration
Pooja invested in Debt Funds
Pooja invested
in Debt Funds
Post Tax Returns ₹ 12,83,334 at 5.13%
Rahul invested in Fixed Deposits
Rahul invested
in Fixed Deposits
Post Tax Returns ₹12,50,115 at 4.64%
Benefits of Debt Funds (DF) over Fixed Deposits (FD)
| Particular | Debt Funds (DF) | Fixed Deposits (FD) |
|---|---|---|
| No Penalty for premature withdrawal |  |
 |
| No TDS (Tax Deducted at Source) | |
|
| Indexation benefit | |
|
| Calculation summary | ||
| Invested amount (A) | ₹ 10,00,000 | ₹ 10,00,000 |
| Return (%) | 5.4% * | 6.25%** |
| Investment duration | 5 years | 5 years |
| Total returns (Invested amount + Returns) (B) | ₹ 13,00,778 | ₹ 13,63,539 |
| Indexed cost of acquisition (C) | ₹ 12,16,912^ | ₹ 10,00,000 |
| Gross returns (B - A) | ₹ 3,00,778 | ₹ 3,63,539 |
| Taxable returns (B - C) | ₹ 83,866 | ₹ 3,63,539 |
| Net tax paid (Tax rate including cess and excluding surcharge) | ₹ 17,444 | ₹ 1,13,424 |
| Post tax returns (Invested amount + tax adjusted returns) | ₹ 12,83,334 | ₹ 12,50,115 |
Post tax returns (%)
View
calculation
summary
|
5.13% | 4.64% |
| View calculation
summary |
||
^ Indexed cost of acquisition is calculated using cost of inflation index as notified by CBDT (Central Board of Direct Taxes).
** State Bank of India Fixed Deposit rate is considered for FD calculation.
* Average returns of short term category
Where Debt Funds invest
State governments bonds
PSU bonds
Corporate bonds
Securities issued by Banks
Frequently Asked Questions
What are different types of debt funds?
A debt fund is a mutual fund that puts money in fixed income instruments such as government and corporate bonds, treasury bills, commercial paper, certificates of deposit and so on. SEBI has categorised and rationalised debt funds into various categories like Liquid, Ultra-Short term, Short term, Medium duration, Long duration etc. Apart from active debt funds, there are target maturity funds as well which have specific date of maturity and are managed passively.
Which debt funds to be considered for investing?
Choice of debt funds will depend on the underlying objective of investment. If an investor is considering debt fund for less than 1 year then debt funds like liquid, ultra short, low duration, money market may make more sense. If investment horizon is short-term (>1 years) then short-term & Banking & PSU category may be preferred. If investment horizon is long term (> 3years) then categories like medium duration, dynamic bond, long duration can be preferred.
If investor is seeking predictable returns over specific period then category Target Maturity funds, roll-down funds & FMP should be preferred.
Can return of debt funds fluctuate?
Return of active debt funds can fluctuate based on movement in interest rates. Higher maturity of the portfolio can lead to higher fluctuation thereby impacting final returns.
Returns of Target maturity funds, roll-down funds & FMP also fluctuate but returns over the maturity of scheme/roll-down tend to be near to YTM of the portfolio at the time of investment.
What is the minimum holding period of debt funds to get indexation benefit for taxation?
Investor need to hold fund for atleast 3 years to get Long term capital gain taxation @ 20% with indexation benefit.
Are debt funds subject to TDS on unrealized gain every year?
Unlike FDs, capital gain is chargeable to tax only when its realized. There is no TDS deduction on capital gain.
It means no hassle of TDS deduction, claiming TDS deducted annually in income tax returns, signing declaration for no TDS deduction etc.
Are debt funds safe compared to fixed deposits?
Safety in debt funds will depend on the credit worthiness of underlying securities. Debt fund with high allocation to sovereign securities and high rated (AAA or A1+) instruments generally have low credit risk.
Further, debt funds have allocation to many fixed income securities thereby portfolio gets diversified unlike FDs which have full concentration risk on the bank.
Investment by Debt Funds are governed by SEBI (Mutual Funds) Regulations, 1996 and respective offer documents. Investments by Fixed Deposit are governed by applicable RBI norms.
- The Fixed deposit interest rate is based on historical State Bank of India Fixed deposit rates for different deposit terms.
- Interest rates on bank fixed deposits are subject to revision by the banks at their sole discretion from time to time.
- Tax laws are subject to amendments from time to time. The user/investor needs to verify all the facts and circumstances with the prevailing tax status and seek appropriate professional advice before acting on the basis of the above information.
Disclaimer:
In this tool DSP Asset Managers Private Limited (the AMC) has used information that is publicly available, including information developed in-house. While utmost care has been exercised while preparing this document, the AMC nor any person connected does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information.
The comparison with Fixed Deposit (traditional saving instruments) has been given for the purpose of the general information only. Investments in mutual funds should not be construed as a promise, guarantee on or a forecast of any minimum returns. Unlike traditional saving instruments there is no capital protection guarantee or assurance of any return in mutual fund investment. Traditional savings instruments are comparatively low risk products and are backed by the Government (except 5- year recurring deposits). Investment in mutual funds carries high risk as compared to the traditional saving instruments and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor.
All logos used in the image are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.
For scheme specific risk factors, Asset Allocation details, load structure, investment objective and more details, please read the Scheme Information Document and Key Information Memorandum of the scheme available on ISC of AMC and also available on www.dspim.com.
DSP Mutual Fund is the leading mutual fund investment company in India.
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