Which mutual fund can I use as a fixed deposit replacement?

Published: January 9, 2022 at 7:00 am

A viewer on our YouTube channel asks, “Sir, are conservative hybrid funds a good alternative for FD? Especially the Parag Parikh Conservative Hybrid Fund. They seem to be investing only in govt bonds, and for stable returns, they are investing in dividend stocks like ITC and coal India. is this fund safe?”

Let us expand this question to ask which mutual fund can be used as a fixed deposit replacement. Technically, we cannot compare a fixed deposit with any mutual fund. And no mutual fund is a replacement for a fixed deposit.

From a practical point of view, our parents invested only in fixed deposits, but we have now “replaced” with equity mutual funds (hopefully) for long term goals (10+ years away). The point is, we can replace one product with another provided we have the right expectations about it. 

We all desire higher returns at a lower tax. While this is possible with mutual funds, we must completely abandon the idea of “safety” or “safety of the amount invested”, to be exact. Mutual funds are not a suitable investment unless we are ready to do this.

Knowing when to invest in which mutual fund is crucial. We know when the risk to the amount invested is reasonable or not.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    Finding an FD replacement for short-term (< 5 years) and medium-term goals (5-10 years) is a lot more difficult as one should choose debt funds for these, and that is a lot tougher than choosing equity funds.

    So here are some simple thumb rules for debt mutual fund selection

    1. Check the average portfolio maturity of the fund. This is the weighted average maturity period of the bonds in the portfolio. Higher this number, the higher the NAV fluctuations.
    2. Ensure the average portfolio maturity of the fund is much lower than your goal tenure. For example, if you need money in five years, choose debt funds with average portfolio maturity of about 1Y or less.
    3. The only exception to this rule is gilt mutual funds which should only be used for long term goals.
    4. Then comes the credit rating of the bonds in the portfolio. Here, one should look at the entire portfolio, not the average credit rating.
    5. Gilt funds used for long term goals to a large extent avoid the possibility of credit defaults. However, technically a gilt fund can invest in risky bonds up to 20% of the portfolio!
    6. Assuming an investor wants to avoid credit risk entirely, then liquid or money market funds are the way to go for short-term and medium-term goals. Although these funds can take on credit risk, finding a style-pure fund in these categories is easier than anywhere else.
    7. One can look beyond money market funds for medium-term goals, but the space there is so messy it is hard to find funds that take on little or no credit risk. Those who can stomach some credit risk can consider an ultra short term fund. Beyond this, the diversity within a category is too much and retail investors are better off without them.

    Now, what about the fund mentioned by the reader? We have written about this earlier – Who should invest in Parag Parikh Conservative Hybrid Fund?

    The fund has already seen instances of negative monthly returns. So it is certainly not “safe”, and those who do not understand the at least above mentioned nuances of debt funds should not invest in this.

    The fund has an average maturity of 6.35 years as of Nov 2021. This means it is only suitable for long term goals. It will be quite volatile if used for shorter periods, and hence the uncertainty on returns will increase.

    In summary, finding fixed deposit replacement in mutual funds is possible only if we appreciate the primary risks in a fund and if these are reasonable for the duration of our investment. Looking at returns is not the way to shop for mutual funds.

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • 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.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or 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 3000 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 what 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 you 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 boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all 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 and teach 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 for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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 analysis 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)