Debt funds or Fixed deposits?
The high rates being offered on bank deposits are very attractive. One would think it was the right time to lock in for the long term. But very few banks offer long-term fixed deposits. For most, five years is the longest tenure; some offer terms of up to 7-8 years. The 10-year deposits being currently offered by some banks are rare. Moreover, the rate is usually lower than that offered on 5-7-year deposits. "Long-term deposits are just not available. Few banks want to take the risk in an uncertain rate regime," says Ritesh Jain, head of investments, Canara Robeco Mutual Fund.
If you want to invest in a safe debt option for the long term, income funds are a good substitute. These 
invest in bonds and corporate deposits, thus benefiting from the high interest rates. "Though such deposits provide a fixed return, the investor is unable to benefit from the movement in interest rates," says Jain. The Canara Robeco Income Fund has given scintillating returns of 13.5% in the past three years.
Debt funds do away with the need to renew fixed deposits or search around for the best rate. The fund manager does that for you, thus reducing the interest rate risk. They also offer liquidity because unlike fixed deposits, an investor can get out of a debt fund without any penalty.
Source: Economic Times
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