FDs v/s Debt Funds

Why should one opt for a pure debt fund in place of other safer investments like bank FDs? The five star rated debt fund - Kotak Flexi Debt has generated an annual return of 7.28 per cent (as on February 14, 2008) for a three year period, whereas any bank FD would have fetched more than that.
-Rahul Maheshwari

It is true that fixed deposits (FDs) are a safer investment option when compared to debt funds. Debt funds are sensitive to interest rate fluctuations unlike an FD which offers a fixed interest rate for a fixed tenure. But the most important difference between these two is the tax treatment on gains. The interest earned on a fixed deposit is to be added on to your income irrespective of the term of the FD. Further, there is no distinction between short or long term capital gains tax in FDs. This overall reduces the yield of a fixed deposit, especially if you fall in the 30 per cent tax bracket.

What makes debt funds a better choice is the tax treatment on its gains. Just like FDs, if you redeem a debt fund within one year then you need to add the gains to your income (Short term capital gains). In case you redeem the investment after one year (long term capital gains) you can avail the indexation benefit.

(by valueresearch)