Debt funds vs Fixed deposits: What Millennials Should Choose

Debt funds vs Fixed deposits: What Millennials Should Choose

Rethinking traditional investments

For decades, fixed deposits have been synonymous with stability and fixed returns in Indian households. However, with inflation eroding the purchasing power of money over time, many millennials are exploring alternatives like debt funds.

Debt funds, a type of mutual fund that invests in fixed-income instruments such as bonds and government securities, offer greater flexibility than FDs.

Depending on the type of fund and the investment horizon, they can also offer comparable or better return potential, especially in favourable market conditions. However, unlike FDs, return or capital stability are not guaranteed.

The choice between the two depends on individual priorities: risk level, liquidity and return potential.

Key factors for millennials to consider

1. Returns on investment

● Fixed deposits: FDs provide guaranteed returns, typically ranging from 5% to 8% annually, depending on the bank and tenure.

● Debt funds: Debt funds have the potential to offer slightly better returns (depending upon the scheme category and tenure), but they are not guaranteed. Market conditions and the interest rate cycle play a significant role in determining returns. A lumpsum calculator or SIP return calculator can help you estimate how much wealth you potentially build with debt funds versus fixed deposits. Do note, though, that actual returns will depend in market conditions.

2. Liquidity and flexibility

● Fixed deposits: Once you lock in your money in an FD, withdrawing it prematurely usually incurs penalties. This lack of flexibility can be inconvenient for those who value easy access to their funds.

● Debt funds: Open-ended debt funds are usually quite liquid. You can redeem your investments at any time, although some funds may charge a small exit load if redeemed within a specified period.

For millennials managing unpredictable expenses or saving for short-term goals, debt funds can offer better flexibility.

Also Read: Top Financial Goals You Can Achieve with an Instant Personal Loan

Systematic investments

One of the biggest advantages of debt funds is the ability to invest systematically through SIPs (Systematic Investment Plans). In comparison, fixed deposits typically only allow a one-time lumpsum investment. This makes debt funds suitable for salaried professionals looking to save money in regular instalments for short-term objectives. For instance, a debt fund may be a suitable way to build a surplus cash reserve than an FD, as it allows systematic investments and easy withdrawals.

By using a SIP return calculator, millennials can estimate how much they should invest monthly to potentially meet their goal. For instance, if an investor wants to build a cash reserve of Rs. 50,000 in one year, by investing in a debt mutual fund where they expect a 7% annual return, the calculator can help you identify a suitable investment amount. In this case, the investor would need to do a Rs. 4,100 monthly SIP to potentially reach this goal.

Risk tolerance: What works for millennials?

Millennials may typically have a higher risk tolerance than older investors. This can make them more willing to accept the risks accompanying debt funds in exchange for slightly better growth potential.

Reasons to invest in debt funds

For millennials, financial planning isn’t just about saving money—it’s about making more strategic investment decisions. Here are some factors that can weigh in favour of debt funds:

1. Higher potential returns: Historically, Debt funds have generated better returns than FDs. However, it’s important to look at the duration of the debt fund’s portfolio. A longer duration debt fund may offer higher potential returns than a short duration one. So, when comparing return potential between FDs and debt funds, it is advisable to match the FD tenure with the debt fund’s duration for a more accurate representation. For instance, the interest on a six-month FD can be compared to the potential returns on a liquid debt fund.

2. Flexibility and liquidity: You can start small with a SIP and withdraw anytime without heavy penalties.

3. Diversification: Debt funds offer diversification by investing in various fixed-income instruments.

Reasons to invest in fixed deposits

FDs may be more suitable in the following scenarios:

● For those who prioritise safety above return potential.

● For short-term savings with fixed goals where guaranteed returns matter.

● As a small, stable component of a diversified portfolio.

● When the investment horizon is short, and the markets are facing a downturn.

The choice between debt funds and fixed deposits ultimately depends on your financial goals, risk appetite, and investment horizon. For millennials who seek liquidity and can tolerate some risk, debt funds may be more suitable. 

However, FDs are also a valuable and time-tested investment avenue, especially for short-term goals or for those who seek capital stability.

The key is to strike a balance and create a financial plan that works for your unique needs.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.