How to shift bank FD to best and safe mutual funds to get regular returns

Firstly we are happy that you have liked Advisorkhoj.com and registered with it. Our endeavour is increase awareness of investments among our readers and provide unbiased insights into many different investment products and product categories. If you are have been visiting on our website and reading our blogs on a regular basis, you may already know the following about mutual funds:-

1. Mutual funds are subject to market risks. Hence there is no guarantee of safety. However, there are different risk grades of different mutual fund products, in other words, not all mutual fund products carry the same risk.

2. Mutual funds cannot assure you guaranteed returns, unlike fixed deposits, where you earn a fixed interest rate over a specified term.

3. Mutual funds are much more tax efficient than fixed deposits and a variety of other fixed income products, including some Government small savings schemes. Please see our articles, Systematic Withdrawal Plans from Debt Mutual Funds give the most tax efficient income and SWP from Debt Mutual Funds give the most tax efficient income over fixed deposits.

In the two above mentioned articles, we have discussed how SWP from debt mutual funds give the most tax efficient income compared to bank fixed deposits.

Coming to your specific question, please note that we do not give specific product advice in Advisorkhoj. However, we can share some guidance, which can help you make the appropriate investment decision after considering your own financial situation and needs. Since, you have mentioned that you want to shift from fixed deposits to mutual funds, we will focus on debt mutual funds only, since equity mutual funds are not comparable with fixed deposits at all, from a risk perspective. It is a good decision on your part, for a number of reasons:-

1. Fixed deposit rates have gone down in the last one year and are likely to go down further in the coming months and quarters due to number of measures taken by the RBI to lower lending rates in the Indian economy.

2. While lower interest rates hurt investors looking to earn income from fixed deposits, it is good for long term debt mutual fund investors, because long term debt mutual funds benefit from lower interest rates. However, long term debt mutual funds are sensitive to interest rate movements. So while in the long term, if interest rates are going down, long term debt funds will give higher returns, in the short term if interest rates fluctuates, the returns of these funds can be volatile.

3. The risk grades of different debt mutual fund debt product categories are different. Gilt funds are one of the risk product categories in debt funds since they are highly sensitive to interest rate movements, followed by long term debt funds (or simply income funds). Short term debt funds have much lower interest risk. Credit opportunities are similar to short term debt funds in terms of interest rate risk and while they do carry some amount of credit risk, which enables them to earn higher returns compared to short term debt funds, the risk of default is low since these funds invest in corporate bonds mostly rated A or higher. To understand the risk return characteristics of different debt fund product categories, please read our article, Demystifying debt mutual funds.

4. In the mutual fund world you can find a large variety of debt fund products, which can be suitable for different investment tenures, interest rate scenarios and risk appetites.

5. As discussed earlier, mutual funds are much more tax efficient than fixed deposits.

We have discussed top short term and long term debt funds in our articles, Top 5 short term debt mutual funds in 2015 and Top 6 long term income funds in 2015. If you have an investment horizon of 3 years or more and some appetite for volatility, income funds may be suitable investment opportunities. If you do not want interest rate related volatility in your asset values, then short term debt funds will be better. If you want limited interest rate volatility and, at the same time, want higher returns as well, you can explore credit opportunities funds. We have reviewed some good credit opportunities funds like, Birla Sun Life Short Term Opportunities Fund and Reliance Corporate Bond Fund in our sections, Debt Short Term Funds Articles and Income Funds Articles. You should consult with your financial advisor and make the best decision that meets your investment needs.