When it comes to investment options, there is a running debate between debt funds and fixed deposits. Some point out that even the highest interest rate on FD may not be enough to beat inflation in the long run as compared to the returns offered by debt funds. Some also point out that interest rates on corporate FDs and individual investments are handsome enough to grow wealth while being absolutely worry-free at the same time. There are several other investment options available including post office schemes and small savings schemes but FDs are the most preferred option for citizens in India.
Debt funds basically invest in fixed income generating instruments including corporate deposits, government bonds and other money market instruments which are usually regarded as safe. Debt mutual funds are valued on the NAV (net asset value) which fluctuate periodically like equity based mutual funds. The current trend of investing in debt funds is based on the inverse relation between bond prices and interest rates, i.e. bond prices go up when interest rates go down. In the current scenario where interest rates are going down, debt mutual funds may help investors to get healthy capital appreciation courtesy the rise in bond prices.
There are some core risks linked with debt funds. Liquidity is a major concern and so is the possibility of any default by the investee company along with interest rate related risks. Government bonds with sovereign guarantees are however considered the most secure options. Papers that have AAA/AA/A ratings are also considered really safe. On the other hand, FD rates even if they are sometimes lower than those offered by debt funds, are absolutely secured and so is the principal amount. This goes a long way towards ensuring greater peace of mind considering the fact that the financial crisis of 2008 was sparked by credit defaults in terms of mortgage debts.
In fixed deposits, the capital invested remains totally safe with the Centre even guaranteeing up to Rs.1 lakh. In case of debt funds, there are risks like the ones mentioned above. However, inflation-adjusted returns can be garnered from debt funds while fixed deposits have pre-fixed interest rates which may not be enough to cover inflation. There is also an expenditure ratio of 0.5-1% in case of debt funds which is totally nil in case of FDs. You should renew FDs in case your current FD is due to mature. Investing in FDs is the best bet for those with a lower appetite for risk and a desire to earn safe and guaranteed returns.