Understanding your investment options through FDs & debt MF

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New Delhi: Until recently, many avoided bank FDs. With questions about their benefits amidst returns that often failed to keep pace with inflation. However, the landscape has shifted in the past one to two years with the RBI’s repo rate hikes. It resulted in FDs now offering inflation-beating returns. Notably, interest rates on FDs in some banks have even outperformed certain mutual fund schemes.

Let’s delve into how these FDs have the potential to generate significant earnings-

North East Small Finance Bank recently revised its fixed deposit interest rates on June 20. The bank is offering the highest interest rate of 9% on FDs ranging from 546 to 1,111 days. Senior citizens, aged 60 years and above, are getting an extra 50 basis points, totaling 9.50% interest.

For FDs of 546 to 1,111 days (non-callable), the bank is offering 9.25% interest to the general public. Senior citizens are receiving an interest rate of 9.75%. Non-callable FDs have a lock-in period, preventing withdrawal before maturity.

Apart from North East Small Finance Bank, there are several other small banks offering better returns than mutual funds. For example, Sunrise Small Finance Bank is offering 8.65% annual interest on a 2 years 2 days FD. Ujjivan Small Finance Bank offers 8.50% interest on a 15-month FD. Equitas Small Finance Bank offers 8.50% on a 444-day FD. Whereas Jana Small Finance Bank offers 8.50% on a 365-day FD. AU Small Finance Bank offers 8% interest on an 18-month FD.

In comparison, returns on debt mutual funds are lower. Most debt mutual fund schemes typically provide annual returns of up to 7.5%. According to AMFI data, the returns for some direct schemes as of June 20, 2024, are as follows: Edelweiss Liquid Fund 7.43%, Mahindra Manulife Liquid Fund 7.42%, Aditya Birla Sun Life Liquid Fund 7.40%, and Axis Liquid Fund 7.38%.

Debt mutual funds investment-

Debt mutual funds invest in fixed income assets such as corporate and government bonds, corporate debt securities, and money market instruments. This makes debt funds less volatile compared to equity mutual funds. Equity mutual funds, however, tend to offer higher returns in the long term compared to fixed deposits and debt funds, albeit with the risk of market fluctuations.

If you do not want to lock your money for a long time, meaning you want to invest for one to two years, FD deposits are currently the best option. They can potentially earn you more money than debt mutual funds, and deposits up to ₹5 lakh in a bank are insured. However, mutual funds have one advantage over FDs — the option of SIP (Systematic Investment Plan), allowing you to invest a fixed amount every month, whereas FDs require a lump sum deposit.

In conclusion, while FDs have become a more attractive investment option due to rising interest rates, the choice between FDs and mutual funds depends on your investment horizon, risk tolerance, and financial goals.