Money making tips: FDs vs Debt funds, which are better for you? Explained

Most FDs only give you about 8.5% interest before tax and around 7% after tax.

This means, investors are losing money every year that they invest money in a FD. Reuters

Investments are essential for becoming financially healthy to ensure all aspects of life, from physical comforts to emergencies are taken care of without having to worry about it unduly. In short, there is enough money in bank as well as investments to ensure trouble is taken care of. For those who want to get into the same position, there are lots of options to become financially fit, but people are often confused about the best way to proceed. Here we decode the differences between two great investing options - Fixed Deposit and Debt funds. Which of the one is better?

Poonam Rungta, Certified Financial planner believes that one should always take help of a financial planner before taking an investment decision, as investments depend on person to person.

There is no doubt that bank fixed deposits (FDs) are very safe, your money is secured. But do you know that bank FDs can negatively affect your savings over the long term?

Let's find out why debt funds are better than FDs:

1. FDs give returns below inflation:

Most FDs only give you about 8.5% interest before tax and around 7% after tax. This means, investors are losing money every year that they invest money in a FD.

2. FDs are highly taxable, but debt funds are tax saving:

Long-term returns are taxed at 10% for holding period more than 1 year, on gains more than Rs 1 lakh. FD interest is taxable at your current tax slab. But debt funds come with an indexation benefit which makes it a better option.

"An investor with higher tax bracket should definitely invest in debt funds, as it reduces the overall tax burden after indexation benefits," mentioned Hemant Rustagi, CEO, Wiseinvest Advisors.

3. Debt funds give higher returns:

Mutual funds provide professional management of money, are tightly regulated and have proven their performance over time. Mutual funds are also very tax efficient and a little bit of planning can reduce tax on your mutual fund returns to zero (in case of equity mutual funds) or almost zero (in case of debt mutual funds).

4. Regular income:

If you want a regular income from your investments, debt funds are still a better option against FDs due to the long term tax efficiency.

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