Often when a layman has surplus money in his / her hands, they have the same question, what can be done with the surplus funds. And amongst a lot of the people, there is less awareness on the term – Fixed Deposit, and so they end up putting their money in Debt funds, where there is less when compared with Fixed Deposits. What is a debt fund? – A debt fund is like a mutual fund which is required to invest the person’s surplus in a debt instrument like, bond, debenture and money markets.
A Fixed Deposit is an instrument which is a term deposit, provided by several banks and NBFCs, typically subjected to a certain term and conditions and requires lock-in money for a certain period. The period of a Fixed Deposit may vary between 7 days and 10 years. The Interest Rate of a Fixed Deposit is fixed during the time of its opening and is not affected by any kinds of market fluctuations. Some institutions have a penalty fee to disrupt the period of the Fixed Deposit.
But why is there a comparison between Fixed Deposits and Debt Debentures?
In case of a Fixed deposit, there is an annual interest rate of 6.9%, and if the Fixed Deposit is made for 3 years, it sums up to 6.50% which is not the case with Debt Debentures. Debt Debentures are investments which only have an average of 7 – 8.5% per annum.
In the case of debt funds, if the money is left for more than 3 years, it will be taxable. It happens due to an indexation benefit. In simple words, indexation means, to inflate the purchase cost to account for inflation which results in the reduction of tax payment by 20%. If the Debt Funds are held for less than 3 years, the gains are added to the income, and the investor has to pay the tax according to the income tax slab rate applicable. But in case of a Fixed Deposit, these are taxable regardless of the period held.
Let’s understand the difference with the help of examples,
Comparison between Fixed Deposit and Debt Fund (assuming it having different rates of interest)
If the net returns for a year in a Fixed Deposit is 6900 and in Debt Funds it is 4830, after 3 years the amount sums up to 119000, caused due to the indexation benefit of the debt funds. Therefore it reduces the tax liability from INR 6238 in Fixed Deposits to INR 539 in Debt Funds. These benefits can only be availed if they are invested for more than 3 years.
Comparison between Fixed Deposit and Debt Fund (assuming it is having similar rates of interest)
Suppose the net return for 3 years is INR 6051 for Fixed Deposits and nothing for Debt Funds when they have similar rates of interest. In that case, it is better if a person is searching a place to invest for a longer-term, without having to pay excessive taxes on the same, in the case of which, Fixed Deposits is a right choice to make.
Know about Fixed Deposit Calculators
A Fixed Deposit Calculator could be used before making an investment, to determine the interest and the amount which will be received during maturity. It is provided by several banks. A Fixed Deposit’s maturity calculation can be complex and does involve a lot of hard work. The Fixed Deposit Calculator, done online can and will help you find out accurate figures with just a click. It saves your time of calculation. It helps you to draw a comparison between the maturity amount and the interest rates offered by different institutions.
There are 2 types of interest – simple and compound interest rates. For simple interest, the formula used by the calculator caters to, M = P + (P x r x t/100), where, P is the principal amount that you deposit, r is the rate of interest per annum and t is the tenure in years. For compound interest, the Fixed Deposit Return Calculator emphasises on the usage of the following formula –M= P + P {(1 + i/100) t – 1}, where – P is the principal amount, i is the rate of interest per period and t is the tenure.
Types of Fixed Deposit Calculators –
1. Fixed Deposit Calculator
2. Financial Calculator India
3. Bank FD Calculator – EMI PPF NPS RD Tax Sukanya ++
4. FD Deposit Calculator
5. RD/FD Calculator
With these applications, you can make your work easier rather than complicated.
