Debt mutual funds invest in the money market instruments, corporate bonds, government securities, etc. They are relatively safer than most of the investment options. But there are several other factors that investors should know about debt mutual funds vs other investment options.
Here is a list of debt funds vs other investment options to help you get a distinct idea about how much debt funds can be good for your investment goals as compared to other investment options.
1) Debt funds vs fixed deposits
| Low risk | No risk |
| No lock in period | Lock in period of 5 years |
| May provide better returns than fixed deposits | Low returns |
| Fits almost all investment period - short term to long term | Fits long term investment period due to the lock in period |
| Long term bonds are susceptible to market volatility | Fixed rate of returns are assured |
| There is no TDS deduction in debt mutual funds. | In fixed deposits, TDS is deducted if the interest earned is above the threshold. |
| Long term capital gains tax (LTCG) of 20% plus indexation benefit and STCG at 10% | Tax saving FDs is entirely exempt from tax under Section 80C. |
2) Debt funds vs equity funds
| Investments majorly done in bonds, government securities, certificate of deposits, treasury bills, etc | Investments majorly done in stocks of companies |
| Investments made to safeguard the invested amount | Investments made for generating high returns |
| Risk is low to moderate | Risk is moderately high to high |
| Investment held for more than 36 months are liable for LTCG tax | Investment held for more than 12 months are liable for LTCG tax |
| Best alternative for fixed deposits and savings account | Suitable for achieving your financial goals |
| There is no option to save tax | You can save tax of up to ₹ 46,800/- by investing in ELSS funds - a type of equity fund |
| Investment held for less than 36 months are liable for STCG tax | Investment held for less than 12 months are liable for STCG tax |
3) Debt funds vs stocks
| Discipline way of investment with SIP or lump sum. Offers flexibility in investing | Investment in one-go only |
| High cost due to management provided by fund managers | Low cost as compared to debt funds |
| Provides stable returns | High returns potential |
| Investments majorly done in bonds, government securities, certificate of deposits, treasury bills, etc | Investment done in shares of the company making investors the proportional owner of the company |
| Low risk | High risk |
4) Debt funds vs index funds
| Actively managed funds | Passively managed funds |
| Fits all investment period - short term and long term | Fits long term investment period |
| Invests majorly in government securities, corporate bonds, money market instruments, etc | Mirrors the benchmark index components |
| High management cost | Low management cost |
| Fund managers are actively involved | Fund managers may not be actively involved as compared to debt funds |
5) Debt funds vs real estate
| High liquidity | Less liquidity |
| Pocket friendly investing (investors can invest starting from ₹ 500/-) | Significant amount is required |
| Low risk | High risk |
| Less paperwork required | A lot of paperwork required |
| Benefit of power of compounding | No benefit of compounding |
6) Debt funds vs physical gold
| No fear of theft | Fear of theft |
| Stable returns | Comparatively better returns than debt funds |
| Cannot be used as a commodity | Can be used as a commodity |
| Less paperwork required | No paperwork required |
| Extensive research required | No research required |
These are the differences between debt funds vs other investment options. Investors should consider these points before investing. Invest in debt funds by allocating a certain portion of your funds to safeguard your investments and earn decent returns.
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The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent., RankMF | Last Update 21 June 2021
