Debt Mutual Funds vs. Fixed Deposits: Volatility Simulator

Published: August 12, 2013 at 8:00 am

Last Updated on December 18, 2021 at 10:49 pm

This simple Monte Carlo simulator gives you the probability of a debt fund, with variable annual returns, outperforming a fixed deposit.

If you are thinking about investing in a debt mutual fund, but are worried about fluctuating returns (volatility) – especially after the recent crash in bonds, this tool could answer a pertinent question:

rollercoaster. Credit: David Pursehouse (flickr)
Rollercoaster. Credit: David Pursehouse (flickr)

What is the chance that a debt mutual fund, with fluctuating returns, will give me higher post-tax returns than a fixed deposit?

How does it work? You will need to specify, besides other usual inputs, a conservative average return from the debt fund. In order to do this meaningfully, you will need to first identify a debt fund with an impressive track record suitable to your purpose. By average return I am referring to the final compounded annual growth rate (CAGR) you expect from your investment. It is best to choose a return that is a bit lower than historical values. You could even specify a lower return than the fixed deposit return you have in mind.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

You will also need to specify the standard deviation of the returns. This is a measure how much the annual returns deviate from the average (see note below regarding this average). A risky fund will have higher standard deviation. Once you choose your debt fund or at least the type of debt fund, you can get an idea of what kind of a standard deviation to enter in the simulator. You can get this data from Morning Stars fund sheet. The data for SBI dynamic bond is shown below (the title and volatility Measures sections have been joined. Red highlighting added).

SBI dynamic bond

Be sure to study how returns and standard deviation (std. dev. is wrt a return) vary with investment duration. Here is a good introduction to the standard deviation.  Choose the highest standard deviation and lowest returns for a reasonable estimate.

You will also need to enter the number of times the debt fund annual returns will be randomly varied (max. 500). For each such trial, the post-tax debt fund and FD return will be compared. The number of times the debt fund has outperformed the FD is given as a probability.

This kind of simulation is known as Monte Carlo simulation since it is like tossing a dice and setting the result of the toss as the return (Monte Carlo is famous for Gambling). For those interested here is my Monte Carlo Retirement Simulator

There are two kinds of FD post-tax returns: one in which total tax on FD income is paid each financial year and another in which tax (except TDS) is deferred until maturity. More about this can be found here: Debt Mutual Fund vs. Fixed Deposit Comparator – Version II

To get an idea about how the kind of random returns generated, there is another button which executes only one trial.


  • There are two kinds of averages (or mean). Arithmetic average and geometric average. To know how these are calculated and how they can be used as a measure of stock market volatility, see: Understanding the Nature of Stock Market Returns
  • Each type of average has its own standard deviation. Usually, in the context of returns, the geometric average (CAGR) is used for returns. Technically this means the geometric standard deviation should be used along with it. However,the GSD is a number and not a percentage(in this case). Therefore,the arithmetic standard deviation associated with the arithmetic mean is more commonly used as it is a percentage.
    • In the simulator, although the debt fund returns input cells refers to CAGR, the random return generation formula assumes this to be an arithmetic average. For instruments with small volatility (relative to equity that is!), this should not matter too much.
    • If you un-hide the cells in the simulator, you can see I have toyed around with the GSD. More can be done with this. If you are interested for a specific application, let me know.
  • I have assumed that the returns fall in a normal distribution. This may not be accurate. However,for the purposes of volatility illustration and for making a conservative probability estimate, this should definitely suffice.
    • If you don’t like this, then the only option is to compare with actual historical annual returns. This is possible on a fund by fund basis (coming soon!). However it is difficult to compare a fixed deposit with all debt funds of one particular category.
  • Moneylife has made such a ‘study’ for their recent article (a subscription of at least Rs. 100 is needed for access). They have considered ‘average returns of debt schemes that have a corpus above Rs100 crore’. Not too impressed with this. The ‘study’ does not mention the kind of debt funds that have been considered.
    • According to Value Research Online, there are 149 liquid funds, 4 short term gilt funds, 48 long and medium term gilt funds, 144 ‘income’, dynamic bond and similar funds with a corpus of above Rs. 100 crore. To average returns from such diverse funds does not appear intelligent to me.
    • This is again a classic example of data mining and sensationalist reporting. It is time to ask (again), Is This Financial Literacy? 
    • If you are a fan of Moneylife magazine, feel free to criticise me. I promise to publish all criticisms. Do share this article among other fans!
  • Try the simulator with different tax slabs for some insightful results.

Download the debt mutual fund vs. fixed deposit simulator

Please use the tool and let me know

  • If it helps you get an idea of debt fund return volatility and make an investment decision
  • If you can think of ways in which this can be made better.
  • Please share your results and insights in the comments section. This will help everyone.
Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)