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FD vs Mutual Funds: Which is better to Invest?

Created on 31 Oct 2020

Wraps up in 6 Min

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Updated on 12 Sep 2022

FD vs Mutual Funds

Money has become an important factor in our daily lives, and with time, our standard of living has increased. With an increased standard of living, the demand and need for money have also increased. Savings in a bank account only gives a little interest payment just as a favour for depositing your money and letting banks lend it.

So how will investors make money with little risk and high returns?

Investors frequently wind up in an uncomfortable spot with regard to picking the ideal mix of investment options. On the one hand, you have well-established PPFs, FDs, and bank deposits while on the other hand, you have the rewarding choices of investing in Mutual Funds and equities.

Regarding saving money, Fixed Deposits (FDs) are the most ideal alternative for speculators. The explanation is, that it is one of the most established saving instruments and is esteemed to be the most secure with a fixed pace of return.

However, is it still the most suitable venture alternative in the current occasions? Does it give the best returns? Or are there different speculations like Mutual Funds that give more prominent returns and help accomplish an objective in a superior manner?

The overall inclination towards fixed deposits topped around January 2008, when the market was destroyed because of the worldwide downturn, and individuals looked for a more secure haven for their money.

Click here to read more about what happened during the financial crisis of 2008.

Total deposits hit an untouched high of 29.3% in January 2008, keeping up consistent prevalence through that period. The already all-out AUM in the Mutual Funds sector strongly declined again around March 2008 and recorded a compression of 7.32% in FY09.

In any case, as monetary recovery started actively in 2009, the YoY growth pace of the MF sector sailed to 52.27%, while the fixed deposits growth rate declined beneath 25%.

Let us have a look at both Fixed Deposits and Mutual Funds based on various factors and understand the key differences between the two. A clear comparison of the two would facilitate a well-informed investment decision. We will look at different characteristics and compare mutual funds and fixed deposits on their basis.

Meaning of FD and Mutual Funds:

Fixed Deposit

As one of the most secure investment roads, a fixed deposit can assist you with getting guaranteed returns on your deposits. You can store a lump sum amount that builds a fixed interest over a predetermined tenure.

In a fixed deposit, there is no pooling of cash by a gathering of investors, and the interest is chosen before you invest, so the returns stay unaffected by outside market influencers.

Mutual Funds

A mutual fund is a financial instrument, which consists of a portfolio of stocks, bonds, equities, and other market-linked instruments or securities. Several investors meet up to invest in Mutual Funds, with a shared objective of expanding their savings funds.

The absolute income acquired through these ventures is at that point, equally distributed among investors, after deducting the expenses made.

Types of Fixed Deposit and Mutual Funds:

Following are the types of Fixed deposits and Mutual Funds.

Fixed Deposit

Standard Fixed deposit - It is the standard FD plot accessible at all banks.
A portion of the highlights are:

  • Money is kept for a fixed residency.
  • The rate of revenue is predetermined by the bank.
  • Tenure can go from 7 days to 10 years.
  • Interest Rates are higher than a savings account.

Tax Saving Fixed Deposit - As the name suggests, these deposits are instrumental in saving levy and are accessible in practically all banks.

  • One can get an expense exception up to Rs. 1.5 lakh in a year.
  • These FDs have a lock-in time of 5 years during which you can't pull out the amount.
  • Just one-time lump sum stores are permitted.

Special Fixed Deposits - Like standard FDs, these funds are also invested for specific periods. The only difference is if you don't withdraw the money for the specified period, you will earn higher interest on it than Standard FDs.

Mutual Funds

Equity Mutual Funds – A lot of capital in equity Mutual funds are invested into stocks.

Debt Mutual Funds – These assets involve fixed-pay instruments like debentures and bonds.

Hybrid Mutual Fund – Underlying resources incorporate the two; stocks and fixed-pay instruments in half and half MFs.

On the basis of Returns:

Fixed Deposit

At the point when you put resources into a fixed deposit, you become more acquainted with what you will procure before the finish of the development time frame to the spot.

Financial Institutions, notwithstanding, overhaul the rates on which they are offering FDs every once in a while dependent on factors like the repo rate, which is right now 4%.

Fixed Deposits offer a predetermined rate of return over a predefined period. The rate of interest, albeit predetermined, usually varies starting with one bank and then onto the next.

What it implies for you is that, on the off chance that you keep your cash secured for the length specified by the bank, you will undoubtedly get the specific pace of interest offered. 

For e.g., if the FD loan fee is 9% month to month and you decide to contribute Rs 10,000 for a period of 1 year, you will make a neat Rs 938, bringing the last estimation of your speculation to Rs 10,938.

Mutual Fund

Since Mutual Funds majorly invest in equity and debt instruments, the returns on Mutual Funds are completely driven by the exhibition of the market. In a bull market, the profits could go as high as 20% or more, while in a bear market, you can anticipate that the profits should be less.

On the basis of Taxation:

The interest acquired from the Fixed Deposits is taxable, relying upon the tax slab of the individual while the tax assessment on Mutual Fund relies upon the holding time frame. Both short-term capital gains and long-term capital increases are taxed unexpectedly.

On the basis of Risk Factors:

The risk factor is practically unnecessary on Fixed Deposits, and that is the motivation behind why so numerous unassuming speculators run to it without reconsidering.

Concerning Mutual Funds, the danger is fundamentally high as the market fluctuations affect the volume of return.

On the basis of Capital Gains:

If you hold your equity Mutual Fund investment for longer than a year, it will be considered a long-term capital gain(LTCG) while if you hold them for a period that is less than a year, it will be considered a short-term capital gain(STCG).

Tax collection on your Mutual Fund will rely upon the kind of Mutual Fund you are invested in. There are essentially two types of assets accessible in the market: tax-saving funds: which comprise the tremendously popular ELSS schemes and non-tax saving funds: Equity Funds, Debt Funds, and Hybrid Funds.

Final Words

After considering all the points, it is visible that mutual funds can be considered a better savings option due to the following reasons:

Returns are Higher

Returns on Mutual Funds are higher than that of Fixed Deposits. In contrast to Fixed Deposits, the growth is not naturally clipped with a pre-discovered interest rate. If markets progress nicely, you will get a benefit that far outperforms anything else. Regardless of whether the market doesn't do well, you will at present make a lucrative amount if you remain contributing long enough for the drop to pass.

Tax Advantage

With ELSS, you will contribute up to Rs. 1.5 lakhs a year and guarantee charge derivation under area 80C. What's more? Capital gains up to Rs. 1 lakh are tax-exempt if you stay contributing for any rate for three years.

However, it does not mean that fixed deposits are a bad choice. One must remember that mutual funds are subjected to market risks; hence, as much as the possible returns seem high and appealing, they are not guaranteed.

In the case of Fixed Deposits, however, returns are guaranteed, and risks are minimal or non-existent.

In the end, it is better to clear out what you want from your savings and then weigh out all possible risks and returns before making an investment decision for your savings.

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Ishita Jha

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Ishita Jha is an MBA Finance student of BIMTECH, now a blogger; trying to survive the pandemic recruitments. She can be found researching, exercising, and binging to balance life. She finds her happy place in writing.

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