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Unlocking Higher Returns: Your Ultimate Guide to Debt Mutual Funds vs. Fixed Deposits
What is the Fuss?
Asset allocation is key to wealth creation. There are four most popular assets to diversify into: (a) Equity (b) Debt (c) Gold (d) Real Estate.
This edition is about the second popular asset, Debt.
When it comes to debt, usually three popular options pop up:
- Debt Mutual Funds
- Bonds
- Fixed Deposits
The popularity of Fixed Deposits has been on a roller coaster ride. Our parents’ generation heavily recommended it (maybe because in the 1980s and '90s, FDs gave >10% annual return).
And then, many finance influencers nowadays suggest avoiding FDs altogether.
Debt Mutual funds used to be a favourite of investors, as they had significant tax benefits, including lower tax slabs for long-term gains (>3 years) and inflation indexation benefits.
The indexation benefit allowed investors to adjust gains with inflation and only pay for gains made after the inflation adjustment.
These benefits were removed in the 2023 budget. Both Debt MF and FDs are taxed at the same rate per your income tax slab.
In this edition, I cover why Debt Mutual Funds are better for mid to long-term investments in debt (>3 years). Lastly, I will explain situations when fixed deposits may make sense…