FDs or debt funds: Where should you park surplus money in a high interest rate phase?

With bank fixed deposits now offering better interest rates and markets going up and down frequently, many investors are rethinking where to put their money. A common question is whether to move extra money into FDs for safety or keep it in debt funds for better flexibility and tax benefits. The right choice depends on things like how long you want to invest, your tax bracket, and your overall financial plan.

A similar query came from Saniya, a 32-year-old investor and a viewer of The Money Show on ETNow. She has an aggressive risk appetite with around 70% of her portfolio allocated to equities and the rest in debt funds. She is concerned about recent market volatility and is considering whether to move her surplus funds into short-term FDs as rates rise.

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Stick to long-term equity strategy

According to expert Shweta Rajani, Saniya’s current allocation is broadly on the right track. Given her age and assuming a long investment horizon of 20–25 years, a higher allocation to equities is justified.

“With a long-term horizon, 70% equity allocation is comfortable. In fact, it can be stretched to 80% as well, as equities are likely to drive compounding over time,” Rajani said.

She also emphasized that short-term volatility should not be a reason to alter long-term investment strategy. Historically, equities have delivered around 12–14% returns over extended periods, and staying invested is key to capturing that growth.

“Do not be worried about the near-term performance because like I was just explaining some time back if you stay invested for 15, 20, 25 years and you have that time period, you would get that 12-14% kind of returns what equity is expected to give over longer time periods and has given in past as well,” Shweta Rajani said.

FDs vs debt funds: Depends on time horizon

The decision to move money into FDs should primarily depend on liquidity needs. “I would suggest if you need money over the next one year, that is the only time where you should have some debt in the portfolio or shift to some of these FDs if they are giving you an 8% for one year,” Rajani explained.

Since Saniya already has debt funds in her portfolio, there may not be a strong need to shift entirely to FDs unless there is a specific short-term requirement.

Tax efficiency matters

One of the key factors in choosing between FDs and debt instruments is taxation. The expert said that one should look at which tax bracket they are falling into and decide the allocation then.

She said that, “If you are in a tax bracket which is more than 20%, then you may want to consider shifting to an arbitrage fund for your debt portion of the portfolio, that becomes a little more tax efficient than having debt funds or FDs. If you are in a lower tax bracket, then you continue with the debt funds that you have.”

Portfolio construction: Focus on diversification

While suggesting some schemes, Rajani said that she does not know what is the equity portfolio, but in the diversified category of funds, do not take sectoral calls.

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Investors can consider having a flexicap fund, a large and midcap fund, maybe a multicap fund. Allocating around 45% mid, small in the portfolio may also be good from a longer term horizon.

The expert also mentioned that Saniya can consider equity schemes such as Canara Robeco Multicap or Bandhan Large and Midcap, maybe an HDFC Flexi, Kotak Mid and for the arbitrage, she can go in for SBI, ICICI, or an HDFC Arbitrage Fund.

For investors like Saniya, the focus should remain on long-term goals rather than reacting to short-term market movements or interest rate cycles. While FDs can be useful for short-term parking of funds, debt funds or arbitrage funds may offer better flexibility and tax efficiency depending on the situation.

Maintaining a disciplined asset allocation and staying invested through market cycles remains the most effective strategy for long-term wealth creation.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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