With SBI cutting FD rates by 20 bps and over 260 debt mutual funds outperforming them, many experts believe debt funds now offer a more attractive, tax-efficient option for low-risk investors seeking better returns than FDs.
In the current market scenario, short-duration funds, medium-duration funds, dynamic bond funds, and gilt funds can be good investment options with different horizons.
“In the current environment, short-duration funds and medium-duration funds are ideal for those with investment horizons of 1–3 years and 3–5 years, respectively. Dynamic bond funds are also suitable for those who want fund managers to actively manage duration based on changing interest rates. For risk-averse investors, gilt funds, which invest in government securities, can be a good alternative, offering safety with potential for capital gains if interest rates decline further, said Adhil Shetty, CEO of Bankbazaar.com.
Also Read | Sensex @82,300: Should mutual fund investors alter their investment strategy?
State Bank of India (SBI) has cut its fixed deposit (FD) interest rates for both the general public and senior citizens, effective May 16, 2025. According to the website, SBI has reduced FD rates by 20 basis points (bps) across all tenors. The latest FD rate cut comes just a month after the cut announced on April 15.
The interest rate applicable for a tenure of 2 years to less than 3 years is reduced to 6.7% against 6.9% before.
ETMutualFunds analysed the two-year performance of all debt mutual fund categories alongside the interest rates on fixed deposits offered by SBI, India’s largest public sector bank, in the same period.
Around 264 debt mutual funds outperformed the bank deposit rate of 6.7% offered by SBI over the past two years. Four schemes gave double-digit returns, of which the top three performers were from the credit risk fund category.
DSP Credit Risk Fund delivered the highest return of 18.7% over the last two years, followed by HSBC Credit Risk Fund and Aditya Birla SL Credit Risk Fund, which provided 13.8% and 12% returns, respectively, during the same period.
Aditya Birla SL Medium Term Plan delivered a return of 10.4%, followed by Axis Gilt Fund and Axis Floater Fund, which gave 9.6% and 9.5% respectively in the same period. Motilal Oswal Liquid Fund was the last one to offer a 6.8% return in the said period.
Also Read | Railways PSU ETF delivers 16% in a week. Is this the right opportunity for portfolio diversification?
After the outperformance by debt mutual funds, the expert recommends that a prudent strategy is to match the fund category with your investment horizon, a laddering strategy, where you invest across different maturities, can help manage reinvestment risk and interest rate fluctuations and starting a Systematic Investment Plan (SIP) can also help average out costs and reduce the impact of market volatility.
“A prudent strategy is to match the fund category with your investment horizon. For example, use short-duration funds for up to 3 years and medium-duration or dynamic bond funds for longer terms. A laddering strategy, where you invest across different maturities, can help manage reinvestment risk and interest rate fluctuations,” Shetty said.
He further advices that starting a Systematic Investment Plan (SIP) can also help average out costs, reduce the impact of market volatility and investors should focus on funds with high credit quality, avoiding those heavily exposed to lower-rated instruments.
With the RBI MPC meeting scheduled for next month, it's worth noting that the central bank has cut the repo rate by 25 basis points in each of the last two meetings, following a prolonged pause at 6.5% across 11 consecutive meetings.
The expert mentions that it's also important to monitor the interest rate cycle, if further rate cuts are expected, longer-duration funds may deliver capital appreciation and lastly, one should understand the exit load and taxation rules; debt funds held for over 3 years earlier benefited from indexation, but recent changes to tax rules mean post-tax returns should be carefully evaluated.
Finance Minister Nirmala Sitharaman in the last Budget made no change for the debt mutual funds, which continued to be taxed as per the tax slab.
Underperformers
Around 40 debt mutual funds have failed to beat the fixed deposit interest rate offered by SBI. These funds gave returns ranging between 6% to 6.7% in the said period.
Bank of India Credit Risk Fund gave 6.1% and Motilal Oswal Ultra Short Term Fund gave the lowest return of 6% in the mentioned time period.
Also Read | BSE and Adani Enterprises among stocks that HDFC Mutual Fund bought and sold in April
FD vs debt funds
Now coming to the comparison between fixed deposits and debt mutual funds, fixed deposits are considered low-risk investments as they offer a guaranteed return for the predetermined period whereas debt mutual funds have a slightly higher risk associated with them because of the interest rate movement.
The second point of difference comes on the taxation part. The investment in tax-saving fixed deposits is exempted under Section 80C of the Income Tax Act whereas for the debt mutual funds there is no such exemptions. But both fixed deposits and debt mutual funds are classified under the same asset class.
As the fixed deposits offer lower interest rates compared to debt mutual funds, Shetty recommends that investors in the higher tax brackets benefit the most from switching to debt mutual funds, as traditional FD interest is fully taxable as per slab, while mutual funds—although recently taxed differently—still offer relatively efficient returns in some cases.
He adds that savers seeking better liquidity and flexibility than FDs can also consider debt mutual funds, as they generally offer quicker redemption with lower penalties and retired individuals and conservative investors, who are looking for stable income but are open to a little market-linked risk, can shift partially to safe options like gilt or banking & PSU funds.
“Importantly, those with a long-term outlook and an understanding of interest rate movements can strategically allocate to longer-duration or dynamic bond funds for potentially higher returns. However, this shift should be made keeping in mind the risks associated with NAV fluctuations, especially in a volatile rate environment,” he said.
We considered all debt categories such as gilt fund, long duration, medium to long duration, gilt fund - constant maturity 10 year, credit risk funds, liquid funds, money market funds, overnight funds, corporate bond fund, dynamic bond fund, floating rate bond, banking and PSU funds, medium duration, low duration, short duration funds. We excluded debt based target maturity funds. We considered regular and growth options.
We calculated returns for the last two years. We calculated CAGR returns as in debt mutual funds, returns up to one year are annualised, and returns above one year are CAGR.
Note, one should not make investment or redemption decisions based on the above exercise. One should always consider risk profile, investment horizon and goal before making investment decisions.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and Twitter handle.
In the current market scenario, short-duration funds, medium-duration funds, dynamic bond funds, and gilt funds can be good investment options with different horizons.
“In the current environment, short-duration funds and medium-duration funds are ideal for those with investment horizons of 1–3 years and 3–5 years, respectively. Dynamic bond funds are also suitable for those who want fund managers to actively manage duration based on changing interest rates. For risk-averse investors, gilt funds, which invest in government securities, can be a good alternative, offering safety with potential for capital gains if interest rates decline further, said Adhil Shetty, CEO of Bankbazaar.com.
Also Read | Sensex @82,300: Should mutual fund investors alter their investment strategy?
State Bank of India (SBI) has cut its fixed deposit (FD) interest rates for both the general public and senior citizens, effective May 16, 2025. According to the website, SBI has reduced FD rates by 20 basis points (bps) across all tenors. The latest FD rate cut comes just a month after the cut announced on April 15.
The interest rate applicable for a tenure of 2 years to less than 3 years is reduced to 6.7% against 6.9% before.
ETMutualFunds analysed the two-year performance of all debt mutual fund categories alongside the interest rates on fixed deposits offered by SBI, India’s largest public sector bank, in the same period.
Around 264 debt mutual funds outperformed the bank deposit rate of 6.7% offered by SBI over the past two years. Four schemes gave double-digit returns, of which the top three performers were from the credit risk fund category.
DSP Credit Risk Fund delivered the highest return of 18.7% over the last two years, followed by HSBC Credit Risk Fund and Aditya Birla SL Credit Risk Fund, which provided 13.8% and 12% returns, respectively, during the same period.
Aditya Birla SL Medium Term Plan delivered a return of 10.4%, followed by Axis Gilt Fund and Axis Floater Fund, which gave 9.6% and 9.5% respectively in the same period. Motilal Oswal Liquid Fund was the last one to offer a 6.8% return in the said period.
Also Read | Railways PSU ETF delivers 16% in a week. Is this the right opportunity for portfolio diversification?
After the outperformance by debt mutual funds, the expert recommends that a prudent strategy is to match the fund category with your investment horizon, a laddering strategy, where you invest across different maturities, can help manage reinvestment risk and interest rate fluctuations and starting a Systematic Investment Plan (SIP) can also help average out costs and reduce the impact of market volatility.
“A prudent strategy is to match the fund category with your investment horizon. For example, use short-duration funds for up to 3 years and medium-duration or dynamic bond funds for longer terms. A laddering strategy, where you invest across different maturities, can help manage reinvestment risk and interest rate fluctuations,” Shetty said.
He further advices that starting a Systematic Investment Plan (SIP) can also help average out costs, reduce the impact of market volatility and investors should focus on funds with high credit quality, avoiding those heavily exposed to lower-rated instruments.
With the RBI MPC meeting scheduled for next month, it's worth noting that the central bank has cut the repo rate by 25 basis points in each of the last two meetings, following a prolonged pause at 6.5% across 11 consecutive meetings.
The expert mentions that it's also important to monitor the interest rate cycle, if further rate cuts are expected, longer-duration funds may deliver capital appreciation and lastly, one should understand the exit load and taxation rules; debt funds held for over 3 years earlier benefited from indexation, but recent changes to tax rules mean post-tax returns should be carefully evaluated.
Finance Minister Nirmala Sitharaman in the last Budget made no change for the debt mutual funds, which continued to be taxed as per the tax slab.
Underperformers
Around 40 debt mutual funds have failed to beat the fixed deposit interest rate offered by SBI. These funds gave returns ranging between 6% to 6.7% in the said period.
Bank of India Credit Risk Fund gave 6.1% and Motilal Oswal Ultra Short Term Fund gave the lowest return of 6% in the mentioned time period.
Also Read | BSE and Adani Enterprises among stocks that HDFC Mutual Fund bought and sold in April
FD vs debt funds
Now coming to the comparison between fixed deposits and debt mutual funds, fixed deposits are considered low-risk investments as they offer a guaranteed return for the predetermined period whereas debt mutual funds have a slightly higher risk associated with them because of the interest rate movement.
The second point of difference comes on the taxation part. The investment in tax-saving fixed deposits is exempted under Section 80C of the Income Tax Act whereas for the debt mutual funds there is no such exemptions. But both fixed deposits and debt mutual funds are classified under the same asset class.
As the fixed deposits offer lower interest rates compared to debt mutual funds, Shetty recommends that investors in the higher tax brackets benefit the most from switching to debt mutual funds, as traditional FD interest is fully taxable as per slab, while mutual funds—although recently taxed differently—still offer relatively efficient returns in some cases.
He adds that savers seeking better liquidity and flexibility than FDs can also consider debt mutual funds, as they generally offer quicker redemption with lower penalties and retired individuals and conservative investors, who are looking for stable income but are open to a little market-linked risk, can shift partially to safe options like gilt or banking & PSU funds.
“Importantly, those with a long-term outlook and an understanding of interest rate movements can strategically allocate to longer-duration or dynamic bond funds for potentially higher returns. However, this shift should be made keeping in mind the risks associated with NAV fluctuations, especially in a volatile rate environment,” he said.
We considered all debt categories such as gilt fund, long duration, medium to long duration, gilt fund - constant maturity 10 year, credit risk funds, liquid funds, money market funds, overnight funds, corporate bond fund, dynamic bond fund, floating rate bond, banking and PSU funds, medium duration, low duration, short duration funds. We excluded debt based target maturity funds. We considered regular and growth options.
We calculated returns for the last two years. We calculated CAGR returns as in debt mutual funds, returns up to one year are annualised, and returns above one year are CAGR.
Note, one should not make investment or redemption decisions based on the above exercise. One should always consider risk profile, investment horizon and goal before making investment decisions.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and Twitter handle.
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