SBI's highest FD rate now falls to 6.7%. Are debt funds more attractive than ever now?
With
SBI
, the largest public sector lender, highest fixed deposit rate falling to 6.7% post repo rate and CRR cut by RBI and around 260
debt mutual funds
outperforming it, mutual fund experts mention that debt
mutual funds
are now relatively well-positioned versus traditional fixed deposits—especially as FD rates continue to reset lower and with the RBI recently shifting its stance from accommodative to neutral, the room for further aggressive easing may be limited.
'This makes it a good time for investors to consider short duration funds for stability, and dynamic bond funds for flexibility to capture any residual fall in yields or rate volatility. Banking & PSU funds, which invest in high-quality issuers, remain a strong choice for conservative investors seeking safety with better returns & high liquidity,' Sagar Shinde, VP of Research at Fisdom shared with ETMutualFunds.
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'However, with FDs offering guaranteed returns, investors don't need to choose one over the other—it's entirely feasible to have a blend of FD and debt funds depending on time horizon, risk profile & liquidity preference,' he further adds.
SBI has reduced the interest rates on its special fixed deposit 'Amrit Vrishti' scheme while keeping the other regular fixed deposit rates unchanged and this revised rate is effective from June 15. The rate for public under 2 years to less than 3 years has been revised to 6.7% which is the highest among all revised rates.
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Reserve Bank of India in its last policy meeting reduced the repo rate by another 50 basis points to 5.50% and a 100 basis point CRR cut, marking it the third consecutive rate cut in the current calendar year and the second one in the current financial year.
ETMutualFunds analyzed the two-year performance of all debt mutual fund categories alongside the interest rates on fixed deposits offered by SBI, India's largest public sector bank, in the same period.
Around 260 debt mutual funds outperformed the bank deposit rate of 6.7% offered by SBI over the past two years. Four schemes gave double-digit returns, of which the top three performers were from the credit risk fund category.
DSP Credit Risk Fund delivered the highest return of 19.1% over the last two years, followed by HSBC Credit Risk Fund and Aditya Birla SL Credit Risk Fund, which provided 13.7% and 11.9% returns respectively during the same period.
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Aditya Birla SL Medium Term Plan delivered a return of 10.4%, followed by Invesco India Credit Risk Fund and 360 ONE Dynamic Bond Fund which gave 9.3% and 9.1% respectively in the same period. Motilal Oswal Liquid Fund was the last one to offer 6.8% return in the said period.
After the outperformance by debt mutual funds, the expert mentions that in the current context of a likely pause in rate cuts and a neutral policy stance, investors should consider a barbell strategy—allocating to both short and dynamic duration categories.
As the short duration funds help manage reinvestment and interest rate risk for near-term needs, while dynamic bond funds offer the opportunity to benefit if yields continue to drift lower or if volatility creates short-term mispricing, Shinde believes.
'Investors should prefer funds with high-quality portfolios, moderate duration, and reasonable YTMs. Since the direction of rates may now be more data-driven, staggered entries via SIPs or STPs can help mitigate timing risk,' Shinde recommends.
FD vs debt funds
Now coming to the comparison between fixed deposits and debt mutual funds, fixed deposits are considered low risk investments as they offer a guaranteed return for the predetermined period whereas debt mutual funds have a slightly higher risk associated with them because of the interest rate movement.
The second point of difference comes on the taxation part. The investment in tax-saving fixed deposits is exempted under Section 80 C of the Income Tax Act whereas for the debt mutual funds there is no such exemption. But both fixed deposits and debt mutual funds are classified under the same asset class.
As the fixed deposits offer lower interest rates compared to debt mutual funds, Shinde advises that investors in higher tax brackets, with a 1–5-year horizon, can consider diversifying beyond FDs into mutual funds and while debt funds and FDs now have similar tax treatment, mutual funds offer added benefits like no TDS, liquidity, and potential capital gains.
'Arbitrage funds can be more efficient for holding periods of one year or more, while income-plus-arbitrage funds tend to become more tax-efficient when held for over two years,' he recommends.
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'However, mutual funds come with risks not present in FDs. Debt funds can face interest rate, credit, and liquidity risks, and arbitrage strategies depend on market conditions for return generation. Instead of a full switch, a blended allocation—combining FDs, debt funds, and arbitrage-oriented categories—can help investors strike the right balance between stability, flexibility, and post-tax efficiency,' he further added.
We considered all debt categories such as gilt fund, long duration, medium to long duration, gilt fund - constant maturity 10 year, credit risk funds, liquid funds, money market funds, overnight funds, corporate bond fund, dynamic bond fund, floating rate bond, banking and PSU funds, medium duration, low duration, short duration funds. We excluded debt based target maturity funds. We considered regular and growth options.
We calculated returns for the last two years. We calculated CAGR returns as in debt mutual funds, returns up to one year are annualised and above one year are CAGR.
Note, one should not make investment or redemption decisions based on the above exercise. One should always consider risk profile, investment horizon and goal before making investment decisions.
(
Disclaimer
: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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