Debt Mutual Funds Gain Edge Over FDs as Interest Rates Fall

 

Financial experts recommend liquid funds and money market funds as better alternatives to fixed deposits following RBI's 100 basis point rate cut

Investment advisors are steering retail investors toward debt mutual funds as the Reserve Bank of India's consecutive rate cuts make traditional fixed deposits less attractive. With repo rates dropping from 6.5% to 5.5% since February 2025, experts suggest liquid funds, money market funds, and corporate bond funds offer better returns while maintaining safety and liquidity.

The RBI's aggressive rate-cutting cycle began in February 2025, with three consecutive reductions in February, April, and June totaling 100 basis points. Commercial banks quickly followed, slashing fixed deposit rates and reducing returns for conservative investors who traditionally relied on these instruments.

This shift has created new opportunities in the debt mutual fund space. "With falling interest rates on savings accounts and fixed deposits, these instruments are becoming less attractive to investors looking for both safety and returns," says Swapnil Aggarwal, Director of VSRK Capital.

The numbers support this trend. According to AMFI data, liquid funds manage assets worth 5.42 lakh crore across 39 schemes, while money market funds oversee 3.37 lakh crore through 25 schemes. Corporate bond funds, with 21 schemes, manage 2.05 lakh crore.

Debt Fund Options for Different Investment Horizons

Fund Type	Investment Horizon	Key Features	Total AUM
Liquid Funds	Few days to 3 months	Invests in securities maturing within 91 days	₹5.42 lakh crore
Money Market Funds	3 months to 1 year	Short-term instruments up to 1 year maturity	₹3.37 lakh crore
Corporate Bond Funds	2-3 years	Minimum 80% in AA+ rated corporate bonds	₹2.05 lakh crore

Sridharan Sundaram, a SEBI-registered investment advisor and founder of Wealth Ladder Direct, believes these funds offer clear advantages. "Money market funds and liquid funds are better than investing in a fixed deposit. The chances are that bond prices will go up if the interest rates decline further," he explains.

The appeal of these funds extends beyond just returns. They provide the liquidity that fixed deposits lack, making them particularly suitable for emergency funds or short-term cash management. Investors can access their money quickly without penalties, unlike FDs which charge for premature withdrawals.

Liquid funds invest exclusively in debt and money market securities with maturities up to 91 days, offering high safety with immediate liquidity. Money market funds extend the maturity to one year, potentially providing slightly higher returns while maintaining reasonable safety.

"Both categories generally deliver better yields compared to savings accounts and even short-term FDs, making them a more efficient option for short-term financial needs," Aggarwal notes. He particularly recommends them for maintaining emergency funds or managing temporary cash requirements.

For investors with longer time horizons, corporate bond funds present another option. These funds must invest at least 80% of their portfolio in AA+ and above-rated corporate bonds, balancing safety with potentially higher returns.

Preeti Zende, founder of Apna Dhan Financial Services, emphasizes the importance of matching fund selection to investment goals. "If your investment horizon is very short and you prioritize liquidity and safety, liquid funds are the preferred choice. If you can hold investments for a slightly longer period and want somewhat higher returns, money market funds are worth considering."

The shift from fixed deposits to debt mutual funds reflects broader changes in India's investment landscape. As traditional safe havens offer diminishing returns, investors are becoming more sophisticated in seeking alternatives that balance safety, liquidity, and returns.

Sundaram adds perspective on longer-term investments: "When an investor wants to invest funds for 2-3 years, it is better to invest in corporate bonds to earn 1-2 percent higher interest than FDs."

The trend appears set to continue as long as interest rates remain low. With the RBI maintaining an accommodative stance and banks unlikely to raise FD rates significantly in the near term, debt mutual funds are positioned to attract more conservative investors seeking better returns without compromising too much on safety.

For retail investors navigating this changing landscape, the message from experts is clear: consider your investment horizon, understand your liquidity needs, and explore debt mutual funds as viable alternatives to traditional fixed deposits. The key lies in selecting the right fund category that aligns with your financial goals and risk tolerance.