fixed deposits or debt funds?

Fixed deposits or debt funds? Well, that's a question that I have heard quite a few times in recent days. They are different instruments and neither fixed deposits or debt funds can be completely ignored. Hence, you need to understand when to use what and the risk associated with them. 

Fixed deposits are the deposits done with financial institutions like banks against a fixed rate of return for a fixed period of time. And this is mostly considered risk free, although it's not, and can be broken easily these days via net banking and hence quite liquid as well. Why I say fixed deposits are not risk free - if your bank goes bankrupt, then irrespective of how many crores bank owes to you, you would only be entitled for a lakh or two. 

Debt funds are the mutual funds that invest debt instruments like bonds, debentures, government loans, structured loans etc. Read more on the details of types of debt funds.  

Below is a quick comparison of both the products 

	Fixed Deposits	Debt Funds
Rate of return	Gives you a fixed rate of return irrespective of market conditions	Gives you a rate of return which is typically higher than that of corresponding fixed deposit for similar tenure as the redemption period.
Associated Risk	Fixed deposits are considered risk free.	Since these invest in market debt instruments, they are considered riskier than the fixed deposits. The longer the tenure of the bonds the fund is investing in the higher the associated risk and higher the potential return
Liquidity	Fixed deposits now a days can be closed online. And many banks provide you instant credit of the proceeds - however the rate of interest applied would be for the period FD is held and some amount deducted as penalty for pre-mature closure	Liquid funds now a days provide you an instant credit option. All other funds would credit you the proceeds within a matter of 2-3 working days. Also, note that some debt funds have exit load as well if held below a given period. The units are redeemed at market NAV
Part Redemption	Some banks do offer fixed deposits with swipe out facility. Which means while withdrawal, only the amount short in your savings account would be pulled out from your fixed deposit. However, not all FDs are of this nature and can only be redeemed in full.	Debt funds allow you to put in and pull out as much money as you want and whenever you want.
TDS	Banks deduct 10% TDS from the fixed deposits every year and that is submitted to government. Hence, if you keep the money in FD for three years, every year you have TDS deducted from the interest accrued	There is no TDS deducted from mutual funds, the whole interest earned stays with you till the time you really go for redemption of the units. Hence, tax is deferred till redemption
Tax Treatment	Interest earned on Fixed deposits is simply added to your income and taxed based on your tax slabs. This is irrespective of the number of years you hold the fixed deposits.	Income from debt funds i.e. redemption value - invested value for the given units is short term gain if redeemed before 3 years else it is capital gain. Short term gains are added to your income and taxed based on your tax slabs. Capital gains are calculated with indexation benefit, and taxed at 20% irrespective of your tax slabs.

I beleive above comparison is good enough to help you make right decision to choose your vehicle of investments.