Want to switch from FD to Debt Mutual Fund; remember these things

We all make investments to see our hard earned money get multiplied in future, but where should we put our amount to have the best result is really difficult to know.
 
Fixed deposits are generally taken as the most traditional way of investments, especially in case of senior citizens, but sad part is that this option has failed to provide higher returns if compared to debt mutual fund scheme.
 
Fixed Deposits
 
Banks allow an individual to open an FD account by depositing a sum of money for a fixed period of time, which may range between 1 month, 6 months, 1 year, 5 years etc.
 
You earn interest on your deposit made in the FD account. However, the interest rate which stood at 9% per annum on FD in 2013 has now come down to around 6.5% mark.
 
This has come as a bad news for citizens, who fall under 30% income tax bracket, as what they earned has come down to 4.5% per annum. They also need to pay tax, which is deducted at source from the interest on Fixed Deposits, as applicable, according to the Income Tax Act, 1961.
 
Generally, most people choose FD because this is considered to be safe investment, and it help them grow their financial assets without any exposure to volatility and other risks.
 
Debt Mutual Fund
 
Under this scheme, one can invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons.
 
Debt securities also have a fixed maturity date and pay a fixed rate of interest. The returns on a debt mutual fund comprises -Interest income, Capital appreciation/depreciation in the value of the security due to changes in the market dynamics.
 
Considering the robust performance of mutual fund industry, debt instruments are usually expected to provide you returns in the range of 8% - 15%.
 
BankBazaar report suggests that rather than opting for FD and earning lower interest rate, one can get access to debt mutual schemes and enjoy better returns.
 
The report further says that a person needs to keep a list of factors in mind while switching to debt mutual fund scheme from fixed deposits.
 
Investment Tenure
 
There are taxes levied on the capital gains from investment in Indian market. These taxes are different for short term and longer term period.
 
In debt fund, redemption before 3-year period is considered as short-term. Thus on short term capital gains, a person is taxed at the respective income tax slab rate.
 
After 3 years, redemption is seen as long term, hence capital gains are taxed at 20% rate.
 
So always remember, if you made investment for over 3 years, debt fund  proves to be more tax efficient than FD. It considers the inflation rate under indexation calculation that finally results in a lower tax liability. For a short duration, i.e. under 3 years also, debt fund offers a good return.
 
According to BankBazaar, you can decide the duration of the investment as per your financial planning. Splitting your investments into two or three parts as per short- and long-term objective is a good idea. FD doesn’t allow you partial redemption.
 
What type of debt fund you should select
 
The selection of right debt fund is very important when you plan to switch from a FD investment. You can take guidance from professionals and experts from Asset Management Companies (AMCs) prior to selecting the type of debt.
 
You can also avail a Systematic Withdrawal Plan (SWP) option once the correct fund is selected and you have accumulated some income from such investment.
 
How to invest in debt mutual fund
 
The way you invest in recurring Fixed Deposit at regular intervals, you can also opt debt funds through Systematic Investment Plan (SIP) mode.
 
If you are exiting the entire FD amount, you can make lump sum investment in debt fund in one go. However, you should always remember to check the penalty on early exit or the loss in interest while closing the FD investment.
 
It may be noted here that whatever income you have earned from debt fund will not be taxed until you decide to redeem it. In case of FD, you need to pay tax on the accrued interest every year even if such interest continues to remain invested with the bank.