₹10 Lakh In FD Vs Debt Fund: Which Investment Can Grow Faster In 10 Years?
Share this article:
For conservative investors looking for stable and relatively low-risk avenues, fixed deposits (FDs) and debt mutual funds remain popular choices. While both options are known for providing consistent returns, their structure, taxation, liquidity, and earning potential vary significantly. According to financial experts, choosing the right instrument depends on one's financial goals, risk appetite, and investment horizon. This article provides a comparative analysis of FDs and debt funds and explores which could deliver better returns on a ₹10 lakh investment over a 10-year period.
Investors can choose to receive periodic interest payouts or allow the interest to compound until maturity. Senior citizens typically enjoy higher interest rates—usually 25 to 50 basis points more than regular rates. FD types include standard FDs, tax-saving FDs, flexi deposits, and senior citizen FDs.
However, one key consideration is liquidity. Premature withdrawal of an FD before its maturity can lead to reduced interest earnings and, in some cases, penalties.
Debt funds can be categorised based on their duration—overnight, short-term, medium-term, and long-term—and their management strategy, including dynamic, fixed maturity plans, and floating rate funds. Depending on the underlying asset, they may also be classified as gilt funds, corporate bond funds, or infrastructure funds.
Unlike FDs, debt fund returns are not fixed. They depend on the market interest rate cycle. For instance, if the Reserve Bank of India raises the repo rate, bond prices generally decline, leading to a fall in debt fund values. Conversely, when repo rates are cut, bond prices rise, and debt funds can generate higher returns. This variability makes them sensitive to monetary policy changes.
According to tax professionals, this move has levelled the taxation field for both instruments, making return efficiency and liquidity more critical deciding factors.
Of course, these are retrospective calculations and actual future performance can differ based on macroeconomic factors, policy decisions, and market sentiment.
The ultimate decision should be guided by individual financial goals, investment horizon, and risk appetite. A balanced approach, combining both instruments, is often recommended to optimise returns while managing risk effectively.
Disclaimer: This article is for informational purposes only. Investment decisions should be made based on your personal financial circumstances and consultation with a certified financial advisor. All return estimates are illustrative and past performance does not guarantee future results.
Understanding Fixed Deposits
Fixed deposits are traditional investment tools offered by banks and financial institutions, known for offering guaranteed returns at a fixed interest rate. Once the amount is deposited, it earns interest for a defined period, which can range from as short as 7 days to as long as 10 years. The interest rate remains unaffected by market volatility, making FDs a safe option for risk-averse investors.Investors can choose to receive periodic interest payouts or allow the interest to compound until maturity. Senior citizens typically enjoy higher interest rates—usually 25 to 50 basis points more than regular rates. FD types include standard FDs, tax-saving FDs, flexi deposits, and senior citizen FDs.
However, one key consideration is liquidity. Premature withdrawal of an FD before its maturity can lead to reduced interest earnings and, in some cases, penalties.
Exploring Debt Mutual Funds
Debt funds are mutual fund schemes that invest primarily in fixed-income securities like government bonds, debentures, treasury bills, and corporate papers. These funds offer moderate returns and come with varying degrees of credit and interest rate risk.Debt funds can be categorised based on their duration—overnight, short-term, medium-term, and long-term—and their management strategy, including dynamic, fixed maturity plans, and floating rate funds. Depending on the underlying asset, they may also be classified as gilt funds, corporate bond funds, or infrastructure funds.
Unlike FDs, debt fund returns are not fixed. They depend on the market interest rate cycle. For instance, if the Reserve Bank of India raises the repo rate, bond prices generally decline, leading to a fall in debt fund values. Conversely, when repo rates are cut, bond prices rise, and debt funds can generate higher returns. This variability makes them sensitive to monetary policy changes.
Taxation Rules After April 2023
Both FDs and debt funds bought after April 1, 2023, are now subject to taxation as per the investor’s income tax slab. This change removed the earlier indexation benefit that debt funds used to enjoy for long-term holdings. Investments made prior to this date, however, may still benefit from indexation for calculating capital gains tax, depending on the holding period.According to tax professionals, this move has levelled the taxation field for both instruments, making return efficiency and liquidity more critical deciding factors.
Return Comparison Over 10 Years
To understand potential returns, let’s compare both investment options with a ₹10 lakh investment horizon over 10 years.FD Investment Scenario
Currently, the highest 10-year FD interest rates from PSU banks like Canara Bank and Central Bank of India stand at 6.50%. Based on this rate, a ₹10 lakh investment would yield approximately ₹9,05,559 in interest, resulting in a total maturity value of ₹19,05,559 at the end of 10 years.Debt Fund Investment Scenario
Looking at past data for performance reference, ICICI Prudential Long Term Bond Fund (Direct Plan) has delivered an average annualised return of 8.23% over the last decade. If an investor had placed ₹10 lakh in this fund 10 years ago, the corpus would have grown to an estimated ₹22,05,345. This implies a capital gain of around ₹12,05,345—significantly higher than FD returns.Of course, these are retrospective calculations and actual future performance can differ based on macroeconomic factors, policy decisions, and market sentiment.
Liquidity and Flexibility
Debt funds offer superior liquidity, allowing investors to redeem their holdings at any time (subject to exit load, if applicable), whereas FDs are often locked for the tenure chosen. Though some FDs offer premature withdrawal, it usually comes at the cost of reduced interest and possible penalties.Expert Takeaways
Financial experts suggest that investors with a low tolerance for risk and a preference for capital safety may still favour FDs. However, for those seeking better tax-adjusted returns and greater flexibility, especially in changing interest rate environments, debt mutual funds could be the smarter choice over the long term.The ultimate decision should be guided by individual financial goals, investment horizon, and risk appetite. A balanced approach, combining both instruments, is often recommended to optimise returns while managing risk effectively.
Disclaimer: This article is for informational purposes only. Investment decisions should be made based on your personal financial circumstances and consultation with a certified financial advisor. All return estimates are illustrative and past performance does not guarantee future results.
Next Story