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:
What is the chance that a debt mutual fund, with fluctuating returns, will give me higher posttax 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.
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).
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 posttax 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 posttax 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.
Note:
 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 unhide 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.
Related articles
 Debt Mutual Fund vs. Fixed Deposit Comparator – Version II
 Investors Cannot Eat Their Cake And Have It Too!
 Comprehensive Fixed Deposit Calculator – I: Total and Advance Tax Liability
 Comprehensive Fixed Deposit Calculator – II: The Income Clubbing Headache
 Is This Financial Literacy?
 StepbyStep Guide to Selecting a Mutual Fund
 Mutual Fund Returns Comparison: Direct Plan vs. Regular Plan
 The Permanent Portfolio: A Fascinating LowVolatility Option For The Long Term Indian Investor?
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Good Stuff Pattu. I invest in both FD’s and Debt Funds. This tool is very useful to calculate the returns. Off late debt funds have under performed. Keep up the good work.
Thanks Rakesh. This underperformance is not new. In the long run they will do well.
Good Stuff Pattu. I invest in both FD’s and Debt Funds. This tool is very useful to calculate the returns. Off late debt funds have under performed. Keep up the good work.
Thanks Rakesh. This underperformance is not new. In the long run they will do well.
I am a Moneylife fan and subscriber – but I wont criticize you; the articles you refer to are indeed sensationalist and good example of cherrypicking data to suit your “conclusion”s.
The magazine is mostly “stuff” and less “fluff” – that is why it feels even worse;
@Moneylife editors – why undermine your publication with these apparently biased articles – there are enough paid articles and biased news/article generators – why destroy your niche?
Hi, Thanks for taking the time to share you views. I am not sure I understand you correctly. I have not made any conclusions except that investing in a debt fund over a long period (certainly more than 5 yrs) is not only necessary but also very likely profitable.
Like I mentioned to another reader before this blog is about free financial calculators not free financial analysis.
I have not presented any analysis. I have presented tools for the analysis and it up to readers to make up their own minds. I don’t need to present analysis to criticise Moneylife. Some of their articles are that bad.
They are sincere in their intentions. I don’t doubt that. They just go about it in a terrible way.
I am a Moneylife fan and subscriber – but I wont criticize you; the articles you refer to are indeed sensationalist and good example of cherrypicking data to suit your “conclusion”s.
The magazine is mostly “stuff” and less “fluff” – that is why it feels even worse;
@Moneylife editors – why undermine your publication with these apparently biased articles – there are enough paid articles and biased news/article generators – why destroy your niche?
Hi, Thanks for taking the time to share you views. I am not sure I understand you correctly. I have not made any conclusions except that investing in a debt fund over a long period (certainly more than 5 yrs) is not only necessary but also very likely profitable.
Like I mentioned to another reader before this blog is about free financial calculators not free financial analysis.
I have not presented any analysis. I have presented tools for the analysis and it up to readers to make up their own minds. I don’t need to present analysis to criticise Moneylife. Some of their articles are that bad.
They are sincere in their intentions. I don’t doubt that. They just go about it in a terrible way.
Thanks for this post Pattu. I have a request. There are so many different categories of MFs, each may have subcategories, and even subsubcategories. It would be nice, and would certainly help people like me, if you could do a post on this. Also, if you could also cover in the post the tax implications of the categories. Needless to say, other relevant details could also be covered, as you think appropriate.
Will do AK. Thank you.
Thanks for this post Pattu. I have a request. There are so many different categories of MFs, each may have subcategories, and even subsubcategories. It would be nice, and would certainly help people like me, if you could do a post on this. Also, if you could also cover in the post the tax implications of the categories. Needless to say, other relevant details could also be covered, as you think appropriate.
Will do AK. Thank you.