Fixed Deposits vs Debt Funds: Case Study

Fixed Deposits vs Debt Funds

Fixed Deposits vs Debt Funds: Case Study

In one of our previous article, we discussed how Debt funds are better than Fixed deposits. In this blog, we will use real numbers to demonstrate the same.

Case 1: Invest for 1 Year

Amount to be invested: Rs. 1,00,000

Time period: 1 yr

FD Interest Rate: 6.25% (Source:

For 1 yr time Horizon, Ultra short term debt fund is the most suited debt category. The 1 yr Return of some of the good performers in this category has been around 8%. However, while FD returns are futuristic, Debt fund returns are past returns and since interest rates in general have gone down, we might see its impact on debt funds too. Hence a more realistic interest rate of debt funds to consider for this comparison would be around 7%-7.5%. We will do our calculations taking the debt fund 1 yr returns as 7%. You may check the best Ultra Short Term Debt funds here.

Ultra Short Term Debt fund Returns (1yr): 7%

Fixed Deposits vs Debt Funds

You can see here that for all tax slabs, debt funds are a better option than Fixed deposits.

Before we move to the second case, let us first see how the tax calculation is done for Long Term Capital Gains in case of debt funds.

Long Term Capital Gain Tax Calculation: Debt Funds

If you invest in a debt fund for more than 3 years, Long Term Capital Gains (LTCG) taxation applies. For LTCG, debt fund investors can take benefit of Indexation. Please see the below mentioned example.

Invested Amount: Rs. 1,00,000, Investment Date: 18th Sep 2014

Amount after 3 years: Rs. 1,20,000, Redemption Date: 19th Sep 2017

The Government of India shifted the base year for calculation of Indexation benefit to 2001-02 from 1981. The Cost Inflation Index for past 4 financial years is as given below:

Fixed Deposits vs Debt Funds

So, in the above case the Purchase value for Capital Gains purpose will be:

Purchase value * (Index in 2017-18/Index in 2014-15)

= 1,00,000*272/240 = 1,13,333 Rs.

Hence the Capital Gain = 1,20,000 – 1,13,333 = 6,666.67 Rs.

The LTCG tax rate for Debt funds is 20% after indexation. Hence, if a person is in 30% tax slab, then also he has to pay 20% tax, that too on the gain after indexation. In the above case, the tax paid will be:

20% of 6,666.67 = 1,333.33 Rs.

Case 2: Invest for more than 3 Years

Now let us compare investment in Debt funds and Fixed Deposits for more than 3 years. The suitable debt fund category for this case would be Short Term Debt funds. In the past, good short term debt funds have given the 3 year returns of around 9%-10%. However, for this case, we will consider debt fund returns of 8% as an average return. You can check best Short Term Funds here.

Amount to be invested: Rs. 1,00,000

Time period: More than 3 yr, Investment date: 19th Sep 2014, Redemption Date: 20th Sep 2017

FD Interest Rate: 6.25%

Short Term Debt fund Returns: 8%

In FD the tax is deducted every year, however for simplicity purposes we will deduct tax at the end of 3 year period only.

Fixed Deposits vs Debt Funds

You can see that higher the tax slab, higher the gain in debt funds. This is due to the indexation benefit available for debt funds.

As evident from the above two cases, debt funds are definitely a better option than Fixed Deposits for investors, be it for 1 year or for more than 3 years. Hence, the debt portion of your portfolio must be invested in debt funds rather than Fixed Deposits.


What is risky? Fixed Deposit or mutual fund.

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