Debt funds vs Bank FDs: Which is the most tax-efficient investment?
Fixed deposits and debt mutual funds are among the most popular assets for risk-free investors. In spite of rising interest rates, fixed deposits have proven to be a reliable option for Indian retail investors, whereas debt funds are mutual funds that invest in debt securities. Debt funds have generally shown to deliver better-annualised returns than FDs, although bank FDs have a lower risk profile thanks to DICGC coverage. Risks associated with debt mutual funds include credit risk, interest rate risk, inflation risk, and reinvestment risk, whereas risks associated with fixed deposits include liquidity risk, default risk, and inflation risk. Although the two investment categories are mostly equivalent in terms of risk and returns, there are notable tax differences between debt funds and fixed deposits.
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