Most Indians always choose fixed deposits as a way to save money because they are popular and easy to operate. Although they are not as tax-efficient as debt mutuals, fixed deposits can be easily replaced with Gilt Funds if there is no need for steady income flow and the investment horizon is greater than three years.

The FD interest is a yearly addition to the taxpayer's income that is taxed at the investor's individual income tax rate. Debt funds outperform FDs tax-wise, particularly for investors in higher tax brackets.

Investments held for less than 36 months that are short-term capital gains in debt funds are taxed like savings deposits (Basis the income tax slab of the investor). After taking into account the benefits of indexation, long-term capital gains in debt funds (investments held for longer than 36 months) are only subject to a 20% tax. When comparing fixed deposit and debt fund taxation, long term capital gain taxation is therefore a significant benefit of debt funds.

Mutual funds known as "Gilt Funds" only invest in government securities. They are favoured by conservative and risk-averse investors who wish to invest in the shadow of government bonds.

Investors are protected from credit risk because gilt funds only invest in government bonds. The instruments in which these funds invest are backed by the government. Therefore, there is no default risk attached to these instruments.

These funds' maturity profiles can vary. While others are medium or long term, some may be short term. These funds also carry interest rate risk, just like all other bond funds.