Bank FDs vs. Debt Mutual Funds: Analysing returns and risks for informed investments

Investors often grapple with the decision between traditional options like Bank Fixed Deposits (FDs) and newer alternatives such as Debt Mutual Funds, both promising stability and returns. However, discerning their disparities is crucial for informed investment choices.

Recent analysis reveals that six debt mutual fund categories have outpaced fixed deposits' returns over a one-year span, ranging from 6.81% to 7.46%. This contrast is stark against SBI's fixed deposit interest rate of 6.8% for a tenure of one year to less than two years. The analysis, conducted by ETMutualFunds, juxtaposed the performance of debt mutual fund categories with SBI's fixed deposit interest rates.

SBI has revised its interest rates on fixed deposits across varying tenures. For instance, the interest rate for a tenure of 180 to 210 days rose from 5.75% to 6%, and for tenures from 211 days to less than one year, it increased from 6% to 6.25%. Longer tenures, such as two years to less than three years, now offer an interest rate of 7%.

Floating Rate Funds and Credit Risk Funds emerged as top performers among debt mutual fund categories, delivering returns of 7.46% each in the past year. Similarly, Liquid Funds and Money Market Funds provided returns of 7.13% each, while Low Duration Funds yielded 6.92%. Ultra Short Duration Funds offered 6.81% returns in the same period. Analysts attribute this performance to stringent liquidity conditions and the RBI's maintenance of elevated interest rates without altering its stance. In this climate, investors seeking flexibility in their fixed income portfolio may find potential returns in very short-term debt funds like liquid, money market, ultra short, and low duration funds.

Choosing between Debt Mutual Funds and Bank FDs hinges on factors like investment objectives, risk tolerance, and investment horizon. While Bank FDs offer stability and guaranteed returns, Debt Mutual Funds present an alternative for those willing to assume slightly higher risk for potentially greater returns. A well-rounded investment portfolio may incorporate a blend of both options, tailored to the investor's financial goals and risk tolerance. Seeking guidance from a financial advisor can aid investors in navigating the complexities of investment decisions and aligning them with their financial objectives.