Investing money for only 3 Years. Double the bank FDs at similar risk
Safety - Debt Funds have low credit Risk
Common risk faced by debt funds is interest rate risk with funds losing value in a rising rate scenario and vice versa. Fixed Deposits which have been locked in for long tenures also face this risk in terms of opportunity cost but there is no actual loss of value when the deposit is held to maturity.
Liquidity - Debt funds are highly liquid
As per the current tax rules for debt funds, the minimum tenure for long-term capital gains was extended from one to three years. This means that investors will have to remain invested for at least three years if they want the benefit of lower tax on long-term capital gains. However, there are .5 to 1% exit load if redeemed before 1 year, 2 year and in some cases 3 years. This means debt funds are as liquid as any other open ended investments.
Returns - Debt funds are better than bank FDs
As the returns of debt funds demonstrate, you can beat the bank by investing in debt funds. Debt fund investors assume both credit risk (lending to riskier borrowers) and interest rate risk (the risk of bond prices falling when interest rates rise) and are hence compensated by higher returns. In summary, you can beat the bank by investing in debt funds instead. However you should be cognizant of the risks involved and choose the right fund in order get the best possible deal.
Taxation - Debt funds offers tax efficient returns
The other big difference is that of taxation. Returns from bank fixed deposits are interest income and as such have to be added to your normal income. Since many investors are in the top (30 per cent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for less than 36 months (though TDS will not generally be deducted). However for debt funds held longer than 36 months, returns are classified as long term capital gains and are taxed at 20 per cent with indexation.