FD vs Debt Mutual Funds: On Rs 10 lakh investment in each, which may help you get higher return in 10 years?

FD vs Debt Funds: Investors seeking minimum-risk investment options invest in fixed deposits or debt mutual funds. Both provide stable returns, but both have many dissimilarities between them. While FD provides low-risk fixed returns, debt funds provide moderate-risk returns based on the prevailing interest rate and credit risk. FDs come with a lock-in period, and the maximum return is possible when FDs are held till maturity.

Debt funds have high liquidity, and the amount can be withdrawn at any time.

FDs and debt funds purchased after April 1, 2023, are taxed at slab rates, but if they are purchased before the said date, they provide indexation benefit to their investors.

What are other dissimilarities between them, and which of the two—FD or debt mutual fund—may provide a higher return on a Rs 10 investment in 20 years?

Fixed deposit (FDs)

FDs provide guaranteed returns, unaffected by market conditions, at a fixed interest rate for a predefined period.

The FD duration can be from 7 days to 10 years.

The investor invests a lump sum amount in an FD, which they get back along with the interest earned at maturity.

FDs also provide the facility of periodic withdrawals, where the maturity amount is less than if held till maturity.

Senior citizens get 25 bps to 50 bps extra interest rate compared to general citizens. FDs can be regular, tax-saving, senior citizen, flexi, and NRI.

Debt funds

Debt funds are mutual funds that invest in fixed income instruments such as government securities, bonds, commercial papers, debentures, certificates of deposits, etc.

Based on their tenure of securities, funds can be overnight, ultra-short, short, medium, or long-term funds.

On the basis of their management strategies, debt funds can be floating rate, dynamic, and fixed maturity plan.

Based on their type of issuers, they can be gilt, treasury, corporate bond, and infrastructure funds. 

Why debt fund returns are not fixed

Debt funds invest in bonds. When the Reserve Bank of India raises the repo rate, the existing bond interest rate falls.

It means the new bonds are offered at a higher rate, making old bonds unattractive.

If the RBI is increasing the repo rate frequently and the bond prices are falling, debt fund returns will also fall. Its opposite will also happen; debt funds will give higher returns when the RBI cuts the repo rate.

That’s the reason why debt funds sometimes can give higher returns than equity funds, while their returns can also be negative in the increasing repo rate situations.

Rs 10 lakh investment in FD in 10 years

We are taking the highest 10-year FD rate offered by a PSU bank. Canara Bank and Central Bank of India are offering a 6.50 per cent return each on their 10-year FD.

The estimated interest on this maturity will be Rs 905,559, and the estimated maturity amount will be Rs 19,05,559.

Rs 10 lakh investment in top debt fund in 10 years

Since we can’t predict future returns and past performance can’t be future performance, we are taking the past reference of the top long-term debt fund return in 10 years. 

In terms of performance, ICICI Prudential Long Term Bond Fund – Direct Plan has given the highest annualised return at 8.23 per cent in 10 years.

Had one invested Rs 10 lakh in the fund 10 years ago, the estimated value of their investment in today’s date would have been Rs 22,05,345, where estimated capital gains would have been Rs 12,05,345.

(Disclaimer: These are estimated values. Actual calculations may vary.)