Debt fund vs FD

Currently FD are giving 8-9 % intrest in many banks.

Whereas debt mutual fund in past year gave lesser returns of 6-8%

So can we expect debt fund to give more than 9% return?

If yes which debt fund is best to invest?

One thing FD has problem is liquidity , we have to keep it for full tenure otherwise it result in less interest ,
otherwise it’s generally safer investment then debt fund.

FD does not have liqudity issues at all. You can close the fD at any time and get the Capital plus interest upto the period it has run.

When a FD is closed before the tenor, obviously, you will get returns based on the period it has run. Nowadays, since short term FD rates are higher than long term and hence if you close, before the full period, you may in fact get higher rate than what was originally contracted for.


It also depends upon the use case… Usually i invest in DEBT funds so that i can pledge them as cash component and use margin for F&O trading .and make extra 7% yearly retruns in total 6% debt + 7% F&O = 13%.

On the other hand FD i can not pledge and get margin benefit

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Premature Withdrawal of Fixed Deposit

On pre-mature withdrawal of the DOMESTIC, NRO & NRE deposits:

  • FD interest will be calculated at the rate applicable for the period for which the deposit was held with the Bank or contracted rate of the deposit whichever is lower, plus applicable penalty as below:
  • Penalty will be levied on the rate applicable as per the table below

Icici says they will levy 1 % penalty

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most banks are charging penality rate. Customers who had opened FD in the past at older rates are closing and re booking the same. Earlier, banks would oblige if the new FD is opened in the same bank, but nowadays, as this process increase their cost of funds, they give blanket statement that their HO will not waive. In any case even with penality the higher rates would be beneficial (need to calculate and see). However for NRE deposits, no interest is paid if closed within one year.

Thanks Guys
So it means no debt fund can give more than 8% approx right?

just like nifty50 is the benchmark for equity.

10YR RBI bond rate should be the benchmark for debt which is at 7.29 currently.

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Okay got it :+1:

1% penalty is least understood by most. You also need to pay back the difference of interest income at the time of redemption.

eg: If you had originally taken for 10yr FD at say 10% interest. And you prematurely withdrew at the 6th year - then the bank will tell you the 6yr FD pro-rata rate (say its 8%)

Then you need to pay back 6yrs X 2% back to the bank plus the penalty of 1% of the interest income of that particular year (6th only).

@neha1101 do you have hands-on experience on this matter ?

PS: this is what the treasury office told me when i applied to break a 10yr FD


Yes, this is what i understood as well + there we have already paid TDS in past years i think we loose that as well.

I found breaking long term FD is costly affair and calcution is not simple

The above point i did not understand

In your example. If the customer wish to close the fd after 6 years.
The bank will check what was the rate offered when u booked the deposit for six years. If the rate is 8 percent. Then bank will charge a penalty of 1 percent. This in effect means you will get 8 minus 1 ie 7 percent for the duration of six years.

Yes it depends on the bank/credit agency who is giving you the FD. The penalty of 1% can either be for the entire duration’s interest or only for that particular year’s.
But the pro-rata interest payback commonly applies for all FD.

Now it brings us to a special situation wherein you booked a 10 year FD at 5.6% in 2021. And now you wish to break it and re-book. Currently 12-24 months FD rate is 7.25%.

So does that mean the bank pay you 1.65% additional interest if you break it? I seriously dont know as i have never seen this scenario before.

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Here too the same rule will apply. Fd opened in 2021 at 5.6. Assume it was jan 2021. Today is 31 mar 23. The fd has run 2 years 3 months. When u close the bank will check what was the 2 year deposit at that time. Probably 4 percent. Penalty say is .5. So u will get 4 minus .5 for this period. Once the amount comes to your account its upto you to reopen a new fd at the present rates.

Now if the original fd was on quarterly interest being paid to you. Then only the net will be given back as quarterly interest was being given over a period when fd has run

Nowadays its quite easy tp find out how much you will get. Just click on break fd online and the system will display what would be the closure amount. You can then do ur own calculation. The issue is how will you know what was the interest rate offered for different slab in 2021. No one will keep that in their record. I had to accept what the bank will say. Hence when i place a new fd i take a screen shot of various rates for different tenor and keep it with me.

What is pro rata interest payout. I did not get this from your post.

What i have explained is the standard rule applied across bank. Few years back penality was never applied but now most banks are by default charging penal rate. This is because people are closing low cost deposit and reopening the same at present rates. I have closed fds and reopened the same to avail higher rates many times. Very few banks will waive the penal rates if they really value the relationship

@viswaram @neha1101 Thanks both for your insights.

@neha1101 which bank you used to park FD and which is best nowdays?

I thought for ujiivan or jana bank as intrest is very good and up to 5 lac it’s not too risky in sfb also their balance sheet and npa is good so bank is healthy.

The heirarchy that I follow is as follows;-

  1. Small Finance Bank is ok provided they are listed. Double check at DGICI if the bank is insured. Max is 5 lacks.
  2. Universal Banks are ok to park money in excess of 5 lacks.
  3. Co Op banks and other non listed banks are defenetly a no no irrespective of the interest they offer and even if they are insured.

Currently - For shorter tenor, interest rate is around 8%+ (Au Small Finance, Equitas). For longer tenor, DCB bank gives 7.60 upto 10 years. However limit the exposure.
HDFC, Icici banks gives max of 7% for 10 years. I believe these rate will increase when RBI is expected to increase the rate by another 0.25%. Spread your deposits in different names and with different banks.

Got the points ,
Thank you :+1: