Fixed deposits or mutual funds? That depends on whether you are looking at performance, safety or just returns. We undertook an exercise to make this task simpler for our investors.

Let us first look at various fixed deposits from manufacturing companies and non-banking finance companies (NBFCs) where an investor can get reasonably decent returns. These deposits have been selected for safety and returns.

Name	1-YR	2-YR	3-YR	Minimum (Rs)	Rating
Ashok Leyland	11.00%	11.50%	12.00%	1,000	FAA
Dewan housing	10.50%	11.00%	11.50%	2,000	AA
Mahindra Finance	10.25%	11.25%	11.75%	10,000	FAA+
Cholamandalam	10.00%	11.00%	12.00%	10,000	MAAA
Kotak Mahindra	9.50%	10.00%	10.25%	10,000	FAAA
HDFC Ltd.	9.00%	9.25%	9.75%	10,000	FAAA
Fenner India Ltd.	9.00%	10.00%	11.00%	5,000	FAA+
TISCO	NA	NA	10.50%	15,000	FAAA
Larsen & Toubro	NA	NA	10.00%	10,000	AAA
BASF	NA	NA	10.50%	10,000	FAAA

(The above companies are sorted on one year returns)

These deposits should be given priority as they have relatively lower risk. These companies have been ranked highly by credit-rating agencies, so there are fewer chances of default. However returns on these deposits are commensurately low (in line with the lower risk profile) with 9-11% over 1 year. Bank deposits (for 12 months) also give returns ranging from 9-10%, and are popular among investors. But the unfortunate letdown by the Karad Bank (during the Harshad Mehta scam) and now the Madhavpura Mercantile Co-operative Bank (in Ketan Parekh scam) have served as painful reminders to investors about the risk profile of these FDs.

Now lets see how the much-maligned mutual funds fare vis-à-vis fixed deposits. We have taken income and gilt funds for our study, which are also relatively safe by virtue of their investments most of which are in AAA/AA+ securities.

OPEN-ENDED, INCOME FUNDS	NAV (Rs)	12-MONTH (%)
K BOND WHOLESALE G	12.8	18.7%
PIONEER ITI INCOME BUILDER (G)	17.4	18.6%
IDBI PRI DEP BOND G	12.0	18.4%
GRINDLAYS SP SAV G	11.8	18.3%
K BOND-DEP G	12.7	17.9%
DSP ML BOND G	17.2	17.5%
ZURICH HIGH INT G	17.3	17.4%
SUNDARAM BOND A	16.2	17.4%
TEMPLETON INC G	18.0	16.9%
PRU ICICI INC G	14.9	16.9%

As is evident from the table above leading income funds have clocked over 18% growth over the last 12 months. A lower interest rate regime has pulled down bonds yields (and pushed up bond prices) and income funds have been major beneficiaries. However these returns may not be sustainable in future and investors need to see the table in that perspective. However income funds are expected to continue offering higher or comparable returns to FDs. And if you take tax efficiency (given that mutual fund dividends are tax free) and liquidity, mutual funds are a winner.

OPEN-ENDED, GILT FUNDS	NAV (Rs)	12-MONTH (%)
TEMPLETON GSEC G	14.5	25.2%
DSP ML GSEC A G	13.8	24.9%
BIRLA GILT LT G	13.7	24.0%
DUNDEE SOV G	14.0	23.9%
PRU ICICI GILT IG	13.8	22.9%

Gilts (govt. securities) funds have outperformed FDs and income funds in a big way. Gilt funds (in the table) have posted growth of over 20% over the last 12 months. Gilt funds have also benefited from the lower interest rate regime. And if you consider the fact that gilts are safer than even AAA securities, the returns are very attractive. However, investors need to understand that gilt funds are exposed to interest rate risk even if there is no credit risk.

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