Fixed Deposit or Dept Mutual Funds? Where to invest when interest rates rise?

According to the Reserve Bank of India, India has increased its repo rate by 225 points. At that rate, RBI lends money to banks; as a result, the market participants (banks) have increased the fixed deposit rates. As the interest rates are rising, that has led to an increase in fixed deposit rates and lowered the returns of the dept’s funds.

In this article, let’s find the better option for investors to invest in a fixed deposit or mutual debt fund.



What is a Fixed Deposit?

Fixed Deposits (FDs) are the traditional Investment with risk-averse investors who prefer investing in fixed deposits. The Investment is provided by banks such as non-banking financial institutions and house financing companies. In this, depositors must deposit the lump sum over a period; in return, they would get a fixed interest rate throughout the Investment.

In fixed deposits, the interest rate provided by the FD’sFD is much higher than the regular saving in the bank account. If the tenure is completed, the investors can withdraw their Investment and have a choice of reinvesting their money.

Reverse Bank of India has announced the new rule applicable to unclaimed matured FD accounts. The unclaimed fixed deposit account will attract the interest rate as applicable to the saving account or the contracted rate of the matured FD, whichever is lower.

Who Offers the Fixed Deposit?

Commercial banks and some NBFCs and HFCs in India fixed Deposits. The investor must invest in the FD’sFD provided by the commercial bank, NBFCs, and HFC’sHFC. They need to check the rating provided by agencies such as CRISIL to ensure that your money is safe. 

Features of Fixed Deposit

  • The investment tenure of Fixed Deposit can vary across banks and ranges from one day to another day.
  • Return on Investment is compounded periodically, whether monthly, quarterly or annually.
  • The fixed Deposit is slightly higher returns (0.5%) for the senior citizen.
  • In Fixed Deposit, one can invest in a tax-saver to save taxes under section 80C, which is quite good for the taxpayers.
  • A fixed deposit offers a loan against them, and if the Investment gets mature, the investor can reinvest for another term, and they will get a high return if they invest for a more extended period.

Advantages of Fixed Deposit

In fixed deposits, the returns are not tied to the market.

Compounded interest makes Investment faster; Investment is safe as banks and financial institutions are under the Reserve Bank of India.

How to Open a Fixed Deposit Account?

There are two ways you can open an account.


  • Log into any selected bank account.
  • Search Fixed Deposit Option.
  • Then, select the Open Fixed Deposit option.
  • Fill in the application form.
  • Upload all the required documents.
  • Transfer the amount you want to invest.


  • Visit the nearest branch of the bank or any financial institution.
  • Fill in the offline application form.
  • Attach the requested documents with the application and submit it.
  • And provide a check for the amount that you want to invest.

What is Debt Fund?

Debut Fund invests in securities which generate a fixed income, like treasury bills, cooperate bonds, commercial papers, government securities and many other money markets.

Dept funds have a pre-decided maturity date and interest date that the buyer can easily earn on maturity. The returns of debt funds do not affect market fluctuations. This dept has low-risk investment options.

How do Dept funds works?

Dept funds as debut security with a credit card rating allow the investor to understand the possibility of debt user in the principal and interest.

Who should invest in Debut Funds?

Debt Funds are highly recommended to investors because of their lower risk tolerance. It is the funds that usually give the securities to ensure stable returns. In this, there are no guarantees; the returns are usually in an expected range.

They have the following benefits which are the follows:

Medium-Term Investors: This Medium-term investors in debut funds are off (3-12 years), so if you want to invest in a low-risk instrument. Investing in the dynamic bond fund is a fund that is for small tenure and tends to offer better returns than Fixed Deposits. 

Short-Term Investors: The Short-Term Investor is a regular saving account for 3-12 months, offering 7 to 9 per cent returns.

Types of Debut Funds:

Based on the maturity period, there are the following types of debt funds:

  • Liquid Funds
  • Money Market Fund
  • Dynamic Bond Fund
  • Cooperate, Bond Fund,
  • Banking and PSU fund
  • Gilt Fund
  • Credit Risk Fund
  • Floater Fund
  • Overnight Fund
  • Ultra-Short Duration Fund

Liquid Funds: Liquid Funds are the Funds in which you can invest in a money market instrument having a maturity of a maximum of 91 days that tends to a better return than a saving account and is good for short-term savings.

Money Market Funds: The Money Market Fund invests in the money market instrument with a maximum instrument maturity of 1 year, which is good for investors looking for low-risk debt securities.

Dynamic Bond Fund: This type of Investment varies in maturity based on the interest rate. It is good for investors with moderate risk tolerance and an investment horizon of 3 to 5 years.

Cooperate Bond Fund: Cooperate Bond fund which invests a minimum of 80% of its assets in cooperating bonds having the highest rate. This is good for investors with lower risk tolerance and seeking to invest in high-quality.

Banking and PSU Funds: Banking and PSU funds invest at least 80% of their total assets in debt securities of PSU and Banks.

Gilt Fund: Gilt Funds invest a minimum of 80% of their investible corpus in government securities across varying maturities.

Credit Risk Funds: In this, you can invest at least 65% of its invisible corpus in cooperate bonds having a rating below the highest quality cooperate bonds.

Floater Fund: Floater Fund invest a minimum of 65% of the investible corpus in floating rate instrument and carry a low-interest rate risk.

Overnight fund: Overnight fund invests in debt securities having a maturity of 1 day which is considered extremely safe since both credit risk and interest rate risk are negligible.

Ultra-Short Duration Fund: Ultra Short Duration invests money market instruments and debt securities with a scheme between three and six months.

Fixed Deposit investors are the investors who are getting a lot of investors nowadays. As the Reserve Bank of India has hiked the repo rates recently, banks have to increase fixed deposit rates for depositors. Large and well-known banks offer about 7% on a one-year fixed deposit.

Comparing fixed Deposits with the debt funds that return in various categories over the last 1-2 years. The reserve bank of India has hiked the interest rate to tame inflation. This policy causes interest rate rises; bond prices to fall because they are inversely related. As a result, the net asset value (NAV) of debt funds holding bonds also falls. So, the NAV falls, last returns naturally start looking poor.

There is a positive effect of this as you see that the interest rates are increased not immediately but will in the next few months, so the Yield to maturity of these bonds rising means that the potential returns start going up.

Today YTM has been increasing in debt funds due to the debt funds returns have been low in the last several years, and it this expected that the debt return would increase substantially.

While NAV must take a hit due to mark-to-market impact, The rate of hike cycles slows down and ends, the negative MTM impact will be over, and debt funds return will start improving.

The fixed-rate should go up.

Reserve Bank of India has been increasing the policy rates, FD’sFD’s rate will rise a bit higher. As the scenario of increasing YTM’sYTM’s, it’s good to invest in debt funds now because the most important thing is the tax advantage that debt funds have over fixed deposits.

The interest income from Fixed Deposits is taxed as per your slab. The 30% per cent would be your FD’sFD’s tax rate. If you invested in a debt fund for at least three or more years, then the effective tax rate falls as the gain of 20 per cent.

The long-term capital gains tax on debt funds comes with indexations that reduce taxes. Holding periods of more than three years offers better post-tax returns. While poor past returns in debt funds nowadays have not been the same, they work differently.

Frequently Asked Questions

1. What are short-term debt funds?

Short-term debt funds are for low-risk investors with investment horizons with a maturity period of 1-3 years. For the investors, it is the tax-risk investors compared to the fixed Deposit in the high tax brackets.

2. How to invest in the dept funds online?

You may go to the mutual fund’s websites, fill in the application form, and complete the KYC by submitting your PAN and Aadhaar. After it, you may send the money through your online bank account and directly invest in mutual funds online in India through the portals such as cleat tax invest.

3. Why are debt funds better than fixed deposits?

Debt mutual funds are more efficient than fixed Deposits. The capital gains hold debt funds for short-term to long-term capital, making it more tax efficient than fixed Deposits.

4. How Safe are debt mutual funds saved in India?

Debt Mutual Funds are safer than equity funds which invest in stocks and subject to market risk, but debt mutual funds invest in fixed-income securities.


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