Debt mutual funds (MFs) and recurring deposits (RDs) are both low-risk investment tools for investors.
Debt mutual funds are managed by a professional fund manager who aims to generate capital gains via the acquisitions of debt instruments (debt securities) such as bonds.
This is also the key difference between debt MFs and other mutual funds, which are known to invest in equities and other such types of securities.
Generally, debt MFs involve purchasing a portfolio of debt securities along with built-in liquidity. As per this, an investor could sell their shares at any moment without incurring a loss if the investment is underperforming.
Considering that the value of each security is unknown during the purchase, investing in debt MFs ensures less risk as compared to direct investing in individual entities.
Ideally, debt funds are known to offer about 5-8% annual returns. Comparatively, the rate of return is low than other mutual or insurance funds.
On the other hand, RD remains a fixed-term deposit along with a fixed interest rate. As an investment instrument, these can be used for generating regular income as well as to invest in the financial markets on a long-term basis.
Typically, these involve making recurring deposits either with a personal bank account or any other financial institution, including credit card service providers or insurance companies (insurers).
Individuals having a fixed amount every month, or maybe each week can direct such funds to debt repayment with no worry about interest rates or maturity dates.
One of the key benefits of investing in an RD is that an individual can invest their money over an extended period and yet earn the same amount of interest as they may have with an immediate investment.
RD allows an individual to earn specified interest at regular intervals on the amount invested. This is until the time the investment matures or a predetermined term ends. Once the maturity period expires, the total amount, which is invested principal and accrued interest, is paid to the investor.
When it comes to associated risks in the investments under these two instruments, it needs to be noted that debt funds are not totally secure from market risks. This is because lenders are known to charge interest rates that are higher compared to what they gain from savings account deposits, which could result in a higher risk of default. So, in case the creditor defaults on a loan, no assurity is given that the investor will receive their money in full.
For an investor looking at a long-term investment horizon, instead of opting for debt funds, they can go in for other alternatives, including mutual or insurance funds, which tend to offer relatively higher rates of returns.
While looking at risks associated with an RD, it is not possible to withdraw the funds at any time. An investor will be required to wait for a specified period before withdrawing the funds.
Also, after a particular investment account is determined, no alterations can be made to it.
Overall, RDs tend to have a lower interest rate as compared to ordinary bank accounts or other categories of investment accounts.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.