Synopsis: Recent analysis by ETMutualFunds reveals that over the past two years, more than 200 debt mutual funds have outperformed the 7% fixed deposit (FD) rate offered by the State Bank of India (SBI). With expectations of interest rate cuts in 2025, experts recommend diversifying debt portfolios using a combination of constant maturity gilt funds and short-term funds.
In the world of fixed-income investments, fixed deposits (FDs) have traditionally been viewed as a safe option, offering guaranteed returns over a fixed period.
However, recent data has shown that debt mutual funds have outperformed these traditional instruments.
According to an analysis by ETMutualFunds, over 200 debt mutual funds have beaten the 7% return offered by SBI’s fixed deposits over the last two years.
This article explores this trend and highlights why debt mutual funds are gaining traction as an alternative to FDs for investors seeking higher returns and better tax efficiency.
Performance of Debt Mutual Funds vs Fixed Deposits:
ETMutualFunds analyzed the performance of debt mutual funds in comparison to SBI’s 7% fixed deposit rate.
The results were compelling, with more than 200 debt mutual funds offering returns higher than SBI’s FD rate.
Among these, the credit risk fund category emerged as the top performer.
Specifically, the DSP Credit Risk Fund delivered the highest return of 11.65%, while the Aditya Birla SL Credit Risk Fund provided 9.45% returns over the same period.
Other notable performers included:
- SBI Long Duration Fund with a return of 9.44%.
- Aditya Birla SL Long Duration Fund and DSP Strategic Bond Fund, both offering returns of 8.88%.
- Bandhan G-Sec-Constant Maturity Plan and Bandhan G-Sec-Invest, which provided returns of 8.67% and 8.66%, respectively.
Despite the solid performance of debt mutual funds, fixed deposits remain a staple for conservative investors.
However, with more than 200 debt mutual funds surpassing FD returns, it’s clear that these mutual funds offer a competitive alternative, especially in light of expectations for rate cuts in 2025.
Tax Efficiency and Strategy for Higher Tax Brackets:
Investors in higher tax brackets are particularly well-positioned to benefit from debt mutual funds.
As opposed to bank fixed deposits, which are taxed on an accrued basis regardless of whether the funds are withdrawn, debt mutual funds allow for tax deferral.
This can be a significant advantage for those looking to minimize their tax liabilities.
Vishal Dhawan, CEO of Plan Ahead Wealth Advisors, recommends that investors in higher tax brackets consider staying invested in debt mutual funds until they actually need the money.
This allows for greater tax efficiency and defers taxes on capital gains until the funds are redeemed.
Dhawan further suggests a well-structured debt portfolio.
For those in higher tax brackets, allocating up to 50% of their portfolio to debt mutual funds, combined with arbitrage or hybrid funds with lower equity exposure, is a smart strategy.
Fixed deposits, on the other hand, should be reserved for emergency funds, ensuring that an investor’s portfolio is both optimized for return and tax-efficiency.
Outperformance in the Last Year and Future Trends:
In the last year alone, around 254 debt mutual funds outperformed traditional bank fixed deposits, with approximately 18 funds delivering double-digit returns.
The Aditya Birla SL Credit Risk Fund led the pack with a return of 12.13% in the past year.
Meanwhile, funds like the HDFC Long Duration Debt Fund and SBI Long Duration Fund also performed well, yielding returns of 11.91% and 11.74%, respectively.
Looking ahead, experts predict that dynamic bond and gilt funds will gain more focus in 2025.
These categories are expected to benefit from potential rate cuts and stable returns.
Investors seeking higher returns may find these funds more attractive than traditional fixed deposits in the coming years.
FDs vs Debt Mutual Funds: Key Differences
When comparing FDs and debt mutual funds, there are several important factors to consider:
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Risk and Return: FDs offer guaranteed returns with minimal risk, while debt mutual funds carry slightly higher risk due to market fluctuations, particularly in interest rates.
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Taxation:
- Tax-saving fixed deposits qualify for deductions under Section 80C of the Income Tax Act, offering tax benefits.
- Conversely, debt mutual funds do not offer such exemptions but are taxed based on the investor's income tax slab rate.
- A significant advantage of debt mutual funds is that TDS is not applicable upon redemption, giving investors more flexibility in managing taxes.
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Liquidity: Debt mutual funds offer greater liquidity compared to fixed deposits, which lock in funds for a specified tenure.
Conclusion:
With the ongoing shift from fixed deposits to debt mutual funds, it’s evident that investors are seeking better returns and tax efficiency.
As shown by the two-year performance of debt funds, they have the potential to outperform FDs, especially in the current environment of rising inflation and potential interest rate cuts in 2025.
Investors in higher tax brackets stand to gain from deferring taxes through debt mutual funds, making them a compelling option for long-term wealth creation.
Ultimately, the decision between debt mutual funds and fixed deposits should be guided by an individual’s investment horizon, risk appetite, and tax bracket.
While FDs provide safety and certainty, debt mutual funds offer higher returns and tax advantages, making them an attractive alternative for those looking to optimize their portfolios.
Disclaimer: The recommendations, suggestions, views, and opinions expressed in this article are those of the respective experts and sources cited. Please consult with a financial advisor before making any investment decisions.
