Fixed Deposit or Mutual Funds? The dilemma is real.
Traditionally, When it comes to investment, Fixed Deposits have reigned longer than possibly any other alternatives. With mutual funds being quite a novel and modern investment option, it has a long way to catch up with the populace.
For us to decide which is a better investment option, it’s important to understand what they are first.
What is a Fixed Deposit (FD)?
FD, also known as Term Deposits, is a prominently used savings instrument provided by banks and financial institutions for both short-term and long-term investment purposes. The investor opens an FD account with the bank and deposits a certain lump sum amount for a fixed tenure at a fixed rate of interest. You can deposit the amount for specified days, months, or several years.
Your money gets locked for that period while the FD interest rate is fixed on such an amount.
There are two types of FDs:
- Cumulative FD: The interest on principal keeps on accumulating and is reinvested automatically.
- Non-cumulative FD: The investor is paid the interest periodically.
What is a Mutual Fund (MF)?
In simplest of words; a bag of stocks of various companies, debentures, bonds, government securities, etc. In a mutual fund, an investor’s money is “pooled” with others and is then invested with a specific objective. For, e.g., a real estate MF will invest the money in the securities of real estate companies.
Three major types of MF are:
- Equity mutual funds: The fund invests your money in shares and stocks of other companies, so the returns are volatile and depend upon how well the stocks do in the market.
- Debt mutual funds: Your money is invested in debentures and bonds and hence carry fixed returns on investment.
- Hybrid Mutual Funds: As the name suggests, hybrid mutual funds offer an investment mix of equity and debt instruments.
Now that you know what FD and MF are, let’s Understand the difference between these two, so you’ll be able to choose an investment option that suits your needs well.
Fixed Deposit and Mutual Funds: A Comparative Study
Mutual Funds (MF)
Fixed Deposit (FD)
|How can you invest?||You can either invest in an MF a lump sum amount or by SIPs (Systematic Investment Plans). You can approach the MF company or use websites for ease of access.||You can open an FD in any bank or NBFC where you have to deposit a lump-sum amount.|
|How long can you invest?||You’ll be able to invest as long you desire. These funds generally opt for long-term investment purposes.||FDs are for a certain stipulated period ranging from days to years.|
|Which risks you have to bear?||Depending upon the type of MF risks differ, however it’s a lot riskier choice since it is influenced by the market.||The best thing about FDs is zero risks. You get what you deposited on the maturity plus interest accumulated.|
|What are the returns and when do you get them?||MF invests in real-time securities and hence the returns depend on how the market is doing. You can get annualized returns, total returns, or periodic ones. |
In comparison with FD, returns are fairly promising.
|FD interest rate is fixed and guaranteed for the term of an FD.|
Note that: Except for the year 2019, there has been a steep decline in the FD interest rate since the financial year 2014.
|Does investing cost you extra?||In MFs, you have to pay certain other charges like entry load, exit load, One-time charge, etc.||No other expenses are incurred for FD other than penalties on premature withdrawal.|
|When and how can you withdraw?||You can withdraw from MFs free of charge after the expiry of a certain time. For premature withdrawals, the exit load of 1% is levied.||You can withdraw after the fulfillment of the FD term or prematurely with certain charges.|
|What about the taxes on returns?||All MFs are subject to short (STCG) and long term (LTCG) Capital Gains tax. STCG is charged at a flat rate of 15% whereas LTCG is charged at 10% of the returns exceeding ₹1 lakh. In the case of debt funds, LTCG is 20% with indexation benefits.|
You can use an equity-linked saving scheme with a lock-in period of 3 years for your benefit to save tax.
|10% TDS on interest earned in a financial year exceeding ₹10,000 is charged in the case of FDs. You can claim deduction under Section 80C if the FD is for 5 years or more.|
So which is better- FD or Mutual Fund?
It depends on your final goal of an investment. If you want regular monthly returns, go for an FD. If you want higher returns, go for Mutual Funds. But know this- where there is a return, there’s a risk.
If you don’t want to take risks and want a safer option for your large sum of money, choose an FD better. But if you’re a risk-taker, you try dipping your toes in mutual funds’ volatile waters.
Recommended Reading :
- Which is better Fixed Deposit versus Recurring Deposit
- An Alternative to Bank’s Fixed Deposit – Company’s FD
- 7 Key Things You Must Know About Mutual Fund SIPS
- Top 7 Best Balanced Advantage Mutual Funds for monthly Income (Dividend)
- What is the Difference between a Financial Planner and a Financial Advisor?
Both FDs and Mutual Funds have their advantages and disadvantages, so instead of looking for one-fit-all, why not mix it up and enjoy the best of both worlds?