Mutual funds may replace your bank deposits?

Although bank deposits provide a low rate of return, they are termed as one of the safest investment options after government-backed investment products. But still you cannot say that they are completely risk-free as they carry the credit default risk as well as interest rate risk. In this case, investment in mutual funds would be a good replacement for your fixed or term deposits, though the product structure is completely different. Many people would raise a query as many banks' fixed or term deposits provide more returns than that of mutual funds. So the answer to this query is that more returns are provided by those banks or financial institutions whose credit quality is low. So don’t get lured just by the high-interest rates that these institutions provide.
 
If you look at debt mutual funds, some of them may prove to be a better replacement to your bank fixed or term deposits and this may vary based on the time horizon you wish to invest for. Let us assume you wish to invest for a period of five years and you have two options one is your fixed or term deposit of five years and other is medium to long-term debt mutual fund. Medium to long-term debt mutual funds invest in securities and instruments with Macaulay duration of 4 to 7 years. The rate of returns provided by the major banks on its fixed or term deposits is 6.85 per cent for non-senior citizens. For the same period, the average rate of returns provided by medium to long-term debt mutual funds is 7.49 per cent. These returns are pre-tax. So if we consider taxation part then any gains from investment in fixed or term deposits are considered as realized (even though it is not realized in actual sense) and are directly added to your income and are taxed as per the individual income tax slab rates. While any realized gains arising from the investment in debt mutual funds post 3 years is considered as LTCG (Long-Term Capital Gains) and is taxed at 20 per cent with indexation benefit.