Making the choice between investing in a mutual fund or a fixed deposit is challenging and tough. It comes with its own share of advantages and disadvantages. While fixed deposits come with little or no risks, mutual funds are constantly subject to market fluctuations. In this article, we take a detailed look at FD vs mutual fund so that you can come to a decision sooner with respect to your investment.
What is FD?
A fixed deposit (FD) also referred to as a time deposit or term deposit is an investment option offered by banks as well as non-banking financial institutions (NBFCs). It is a safe option because it lets users deposit a lump sum amount at a financial institution for a set period of time. It offers a range of features and the investor can choose to lock in their money for durations such as 7-14 days to up to 10 years.
Benefits of FD
When someone invests in a fixed deposit, the tenure and the interest amount is predetermined. The financial institution gives you the assurance to return the money at maturity. Fixed deposits offer many benefits such as:
● Assured Returns
Fixed deposit (FD) holders get a fixed rate of interest on the amount they deposited. Banks provide online calculators that enable FD holders to calculate the rate of interest they will receive once the FD reaches maturity.
● Safe Investment Options
Fixed Deposits (FDs) are safe investment options because the set rate of interest cannot be influenced by market fluctuations. This makes them both a stable and reliable investment option.
● Hassle-free Investment
With just your standard savings account, you can start your FD investment journey. You can invest by visiting the bank branch or investing online. When the FD matures, the investor has the option to renew it or have the amount credited back to the account.
● Tax Saving
Banks offer tax-saving fixed deposit options to customers in India. Such FDs allow customers to lower taxable income that they need to pay by investing a section of their income in the FD.
● Compound Interest
When the investor reinvests the amount of the matured fixed deposit (FD), they become eligible to earn compound interest. This type of interest refers to interest earned on the principal amount of the FD as well as interest accumulated. This results in a higher overall return on the investment.
● Flexible Tenure
Fixed deposits range from 7 days to about 10 years. FDs are used to meet business as well as personal needs. If someone wants to access their money after a 5-year period, they can choose to invest in tax-saving FD with a 5-year lock-in.
● Loan Against FD
The investor uses funds from the fixed deposit to finance themselves in place of taking out unsecured loans that come with a high interest rate. Loans that are taken out against the FD have a lower rate of interest than the FD itself. Taking the loan against the FD doesn’t require the depositor to cancel the FD. They continue to earn interest on the FD while using funds for financial requirements.
What is a Mutual Fund?
A mutual fund is a financial vehicle that functions by pooling in assets from different shareholders in order to invest in securities such as bonds, money market instruments, stocks and other forms of assets. Mutual funds are managed by professional managers who allocate the fund’s assets and attempt to produce income or capital gains for the investors. The portfolio of the mutual fund is structured in a way that matches the investment objectives that are stated in the prospectus.
Benefits of Mutual Fund
There are certain benefits associated with mutual funds that drive investors to invest in them at high frequency. Some of these benefits are:
● Portfolio Management
When purchasing a mutual fund, the investor needs to pay a nominal management fee as part of the expense ratio. This is used to hire a professional manager who buys and sells the stocks and the bonds.
● Risk Reduction
There is reduced portfolio risk through diversification since most mutual funds invest anywhere from 50 to 200 different securities based on the focus.
● Dividend Reinvestment
As dividends and other interest sources are declared for the fund, they are used to purchase additional shares in the mutual fund helping the investment to grow.
● Convenience and Fair Pricing
Mutual funds are easy to comprehend and purchase. The minimum investments are pretty low and they are traded once a day at the closing net asset value (NAV). This rules out the disadvantages that come with price fluctuations throughout the day.
Difference between FD and Mutual Fund
To help you decide which financial option you want to invest in, a table has been provided below listing out the key differences between the two.
Basis | Fixed Deposits | Mutual Fund |
Returns | Fixed rate of interest | Market-linked performance |
Expense | No expenses | Existence of expense ratio |
Risk | Low | Low to high, depending on the type |
Liquidity | Low | Typically, high |
Investment Amount | Specified minimum amount. Usually, no maximum amount | Specified minimum amount. No maximum amount |
Taxation | Taxable | Taxable |
Tenure | Fixed tenure (1-10 years) | No fixed tenure. Based on investor preference. |
Fund Management | No fund manager is required | Fund manager |
Regulating Authority | Reserve Bank of India (RBI) | Securities & Exchange Board of India (SEBI) |
Flexibility | Low, subject to penalty | High |
FD vs Mutual Fund: Where to Invest?
A fixed deposit has been the most preferred option for Indian investors for decades. Often, investors don’t even think twice before investing in them. But mutual funds can be a better alternative albeit, at the cost of some risks. They have the chance of providing better returns and the taxation is also quite favourable. The investor does not need to pay tax on mutual funds while the returns are accumulating. The tax has to be paid only when the mutual fund units are sold at a profit. This is not the case with fixed deposits, which are taxed even while the interest is accumulated.
Calculator
Deciding where you want to invest your hard-earned money can be tough. To help you come to a quick decision you can take the benefit of FD vs mutual fund calculator. Such calculators are simulations that are available as free tools online across bank websites. They help to calculate the returns from the investment amount. Such tools are easy to use and give you a clear idea of the maturity value of the investment prior to it in real time. When you know the amount of money you will get at the time of maturity, you can create a budget for the expenses and achieve your financial goals easily.
Conclusion
While both fixed deposit and mutual funds are great investment options, the investor has to make the tough call to choose between the two weighing the pros and cons. When it comes to the topic of FD vs mutual funds, fixed deposits are time-tested investment options to grow steady wealth. Mutual funds come with risks but if the investor is willing to go the mile, they can be assured to be rewarded with high returns.