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Fixed Deposit Vs. Debt Mutual Funds: Where Should Businesses Invest?-Shootih

Fixed Deposit Vs. Debt Mutual Funds: Where Should Businesses Invest?

Fixed Deposit is a go-to, trusted investment option for every Indian household. As individuals, we have learned that the best and the safest way to invest your money is by depositing it in a fixed deposit. With its stable 6-7% interest rate annually, fixed deposits are the favorite choice of individual investors in India. 

But what about businesses? 

Is it wise for businesses to invest their idle money in fixed deposits? 

Probably not! Mutual funds can be a great alternative but then again, the risk! 

Debt mutual funds, known as the low-risk, liquid, and flexible investment option can be something business owners & CEOs might want to explore. 

To help you choose between FD & debt mutual funds, we have attempted to share in-depth information along with crucial considerations about both in this blog! 

So let’s start with a bank fixed deposit. 

What Is a Bank Fixed Deposit? 

Fixed deposits are the investment options mostly offered by banks. It allows individuals to deposit a lump sum amount for a fixed maturity period on a fixed rate of interest. The investment amount can be anything from Rs. 5000 & upwards. The maturity period can be between 7 days to 20 years. The interest rate is determined by regulatory bodies like RBI and can vary from bank to bank. The present interest rate of fixed deposits in India is between 4.75%-6% depending on the term of the deposit.

The interest rate is locked when you make a fixed deposit with a bank and this rate remains the same regardless of changes in the market nationally & internationally. That means, whether the interest rate rises or falls, the investor will get the returns according to the same interest rate when he invested. 

The capital gains from fixed deposits are taxable and depend on the tax bracket an investor falls into. They have no risk as the FDs are issued by the banks and there’s hardly any chance a bank will default in paying back the customers.

How Does Fixed Deposits Work?-Shootih

You can invest in a fixed deposit when:

You don’t want to take any risk:

If you are someone that’s not willing to take any kind of market risk at all, then fixed deposits are an ideal option for you. 

You want guaranteed returns: 

Unlike any other investment options, FDs are considered the most secure as they continue to generate returns on locked interest rates regardless of the market volatility. So if you are looking for a guaranteed year-on-year return that might be lesser than the other investment options but is guaranteed, then you can invest your money in bank FDs. 

You don’t have to withdraw money in case of emergencies: 

Due to their restricted liquidity, you can only withdraw an FD upon maturity in most cases. So if you are looking to secure your capital for the time being and won’t have to withdraw it during emergencies, then you can invest your money in FDs. 

Now that we have understood everything about FDs, let’s move on to the following important investment instrument, debt mutual funds. 

What Are Debt Mutual Funds?

Debt mutual funds invest in securities like corporate bonds, treasury bills, commercial papers, government bonds, and other such instruments. These are known as fixed-income securities as they give a fixed rate of interest to the investors as returns. Much like bank FDs, most debt mutual funds come with a predetermined maturity date and interest rates. They are also considered safer than equity funds as they do not invest in stocks, the highly volatile securities. 

How Debt Mutual Funds Work?-Shootih

Types of Debt Mutual Funds:

There are the following types of debt mutual funds:

Debt Mutual FundDescription
1. Liquid FundsLiquid funds come with a maturity period of 91 days. So any business that decides to invest in liquid mutual funds can get back their investment amount and returns in just 91 days. As the name suggests, an investor can liquidate the investment anytime, even before 91 days.

Read in detail about liquid funds in our blog Liquid Mutual Funds – What Are They And How Do They Work?
2. Overnight FundsEver thought you can multiply your idle cash overnight? Well, it is possible with overnight mutual funds. While multiply would be an exaggeration, you can get fair returns on your investment while investing them for just 24 hours with overnight mutual funds. 

Want to know more? Here is All You Need To Know About Overnight Mutual Funds
3. Short & Ultra-Short Duration FundsShort & ultra-short duration funds are suitable options for business owners looking to invest their money for a limited time. Short-term mutual funds have a maturity period of 1 to 3 years, whereas ultra-short-term mutual funds have a maturity period between 3 to 6 months. 

Read Low Duration Mutual Funds – Here Is Your Complete Guide 
4. Gilt FundsThese debt mutual funds only invest in government bonds and securities. These are extremely high-rated securities with the bare minimum risk ideal for the investors trying to avoid market risk as much as they can.
5. Money Market FundsThese debt funds invest in the money market securities for a maximum duration of 1 year. Another great option for the investors that want to park their idle cash for a limited time. 

You can invest in debt mutual funds when: 

You have short-term goals:

Debt mutual funds can be the perfect option for fulfilling your short-term goals like buying machinery, repaying loans, buying back shares, paying dividends, etc. 

You can take a slight risk:

Businesses can invest in debt mutual funds when they are prepared for slight market risk to get better returns. Even though mutual fund investment is subject to market risk, the risk associated with debt mutual funds is not as much as the equity funds therefore businesses willing to take even the slightest risk can invest in debt funds. 

You are looking for higher returns: 

If you are not satisfied with the returns of conventional FDs, debt funds are the best option for you. With high liquidity and short lock-in periods, investors can get fairly high returns on debt funds as compared to fixed deposits. 

You don’t want to stay invested for too long: 

Businesses often have ongoing transactions and even though they have some idle cash, they might need it as soon as a new transaction comes up. Therefore, it is not always possible for businesses to stay invested for long periods. Unlike equity funds, which yield the right returns when you are invested for long periods, debt funds offer substantial returns in a shorter time.

Comparison Chart: Fixed Deposit vs. Debt Mutual Funds

Here is a comparison chart of fixed deposit and debt mutual funds to give you a clear and objective picture of the major differences between both the instruments to help you decide which one is the better option for you:

Comparision Chart: Fixed Deposit vs. Mutual Funds-Shootih

Let’s understand these differences one by one:

  1. Returns:

The sole purpose of any investment is to get returns. While fixed deposits generate annual returns of 6% to 7%, debt mutual funds can give about 8%-10% average returns within the maturity period. And this is just the average range, investors can get even higher returns based on the type of debt fund and a few other factors. 

  1. Lock-in Period:

As far as fixed deposits are concerned, the lock-in periods are followed quite rigidly. Even though investors can in some cases withdraw their money before the maturity date, they will be penalized for doing so. The lock-in period for a fixed deposit starts from 7 days and can go up to 10 years. 

Debt funds on the other hand have way shorter lock-in periods and yet offer better returns than FDs. 

  1. Risk

Debt mutual funds are riskier than FDs. Fixed deposits are without a doubt one of the safest investment options available for investors. However, the longer lock-in period and lower returns might make them unattractive for the business owners looking to invest their idle cash. Debt mutual funds on the other hand are riskier, they are subjected to credit risk and interest rate risk, but they can be combated through credit ratings, quality of funds, etc. 

  1. Liquidity:

This one goes without saying, debt mutual funds are way more liquid than the FDs. With debt mutual funds, investors get an option to withdraw their money even before the maturity period without any penalties. This makes debt funds an ideal emergency fund as investors can liquidate them as soon as an important expense occurs.

  1. Investment Options:

While you need to deposit a lump sum amount in a fixed deposit, you can choose to pay the whole sum or SIPs for debt funds. 

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    Our Two Cents: 

    While bank FDs are the safest and one of the most ideal investment options for individual investors, they might not be an ideal investment option for investing in a business’ idle cash. Debt mutual funds are certainly more profitable, dependable and flexible options for business owners that are looking to park their idle cash for a short duration. 

    The only difficult part about investing in debt mutual funds is finding the right options, filling in the endless paperwork, paying brokerage, etc. But that too can be taken care of with Shootih. 

    Shootih is the best mutual fund investment platform made to handle all the mutual fund investment needs of SMEs and MSMEs. 

    With Shootih, you can not only find a plethora of debt mutual funds to invest in, but you also don’t need to worry about paying brokerage fees or filling out extensive paper works. We are the best direct mutual funds platform that can help you invest your idle cash in a few simple steps. 

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