Mutual funds and fixed deposits (also known as FDs) are extremely popular among investors. Both these instruments are different in features, but the only common denominator is that they provide good returns over time.
If you are planning on investing your money to make great savings for your future, it is advisable to get thorough knowledge on both these investment plans and understand which one will work the best for you.
Read this article to get a better understanding of fixed deposit vs mutual fund.
Understanding of Fixed Deposit & Mutual Funds
When most of us hear the phrase mutual funds, we think of that sped up warning that plays on the radio and tv after investment ads. Fixed deposits, on the other hand, evoke images of broken piggy banks overflowing with money.
When it comes to fixed deposit vs mutual fund, both investment options are immensely popular in India, but which one is the right fit for you? Worry not, we’re here to help you figure out the difference between mutual fund and fixed deposit and how you can make the right choice for you.
What is Fixed Deposit?
Fixed deposit, otherwise known as FD is a tool for investment offered by banks (also by non-banking finance companies) to their customers. FD is an account wherein you invest a predetermined amount of money at fixed intervals. This instrument was invented to help customers save money. Once your tenure is ended, you receive the principal amount invested along with interest.
FD is considered one of the most trusted ways to save money. Banks differ with their interest rates for FDs.
What are Mutual Funds?
Mutual funds is an instrument where many investors pool their money and invest together in order to earn returns on their capital eventually. Fund manager or portfolio manager managers these corpus of funds. It is the fund manager’s duty to invest the corpus in different stocks, gold, and other profitable assets where potential returns are foreseen. The investors share the gains (or losses) collectively, according to the proportion of their contribution in the fund.
Fixed Deposit vs Mutual Fund: Key Differences Between FD & MF
Head spinning a bit? Still wondering what the actual, practical difference is for fixed deposit vs mutual fund? Here’s a handy table telling you everything you need to know to make that informed choice (instead of using akkad bakkad!) Here is the difference between fixed deposit and mutual fund, in a neat little table for you:
|The Factor of Consideration||Fixed Deposits||Mutual Funds|
|How are the returns determined?||Returns are based on a fixed interest rate that is set at the beginning of the investment period.||Returns are linked to the market, and are dependent entirely on the health and performance of the national and global economy.|
|What’s the risk like?||No risk: returns are steady and guaranteed based on the interest rate fixed at the time of investment.||Moderate to high risk: depending on the market the investment is made in and the fund the investment has been made in. The link to the market means there is a chance of losing your money.|
|Are there other expenses?||No, other than tax rules, you pay nothing extra to the bank for your investment.||Yes, fund management charges will be levied on your investment at stipulated intervals.|
|What are the rules of withdrawal?||Depends on the terms of the deposit, but once the investment term is over, you get your money back. If your deposit has no lock-in period, you can withdraw your money any time.||Depends on the fund: some mutual funds have lock-in periods, past which you can withdraw your money when you like. If you want to withdraw before this lock-in period, you’ll need to pay an exit load charge.|
|How is my investment taxed?||Returns on interest are subject to taxation based on your tax bracket, plus there’s a TDS of 10%, which can be claimed if you don’t fall under a tax bracket. (This doesn’t apply to tax saver FDs, though, which have separate tax rules.)||Both short-term (at 15%) and long-term (at 10%) capital gains taxes apply to earnings from mutual funds once they cross the threshold of Rs. 1 lakh.|
|Who is the regulatory authority oversees this?||The Reserve Bank of India (RBI) keeps an eye on fixed deposit investments.||The Securities and Exchange Board of India (SEBI) keeps an eye on mutual fund investments.|
Also Know: Difference Between SIP and Mutual Funds
Choosing Between Debt Mutual Funds and Fixed Deposits: Key Financial Parameters
Now you know everything there is to know about the difference between fixed deposit and mutual fund. But which one is the best fit for you? As with most investment plans, the best choice for you depends on your own financial goals and risk appetites: how much risk are you willing to assume? What are your goals? How much money do you have to invest?
Are you Looking to Invest Short-Term or Long-Term?
While long-term investments generally yield higher returns, sometimes you want to take the quick and easy route. Once you decide how long you want to invest for, you can choose between fixed deposit vs mutual fund based on market projections or interest rates offered by FDs.
Are You Willing to Invest With Lock-in Periods?
While lock-in periods do lock away your money, so you don’t have access to it, they also ensure you can see returns in the long term. Many mutual funds have lock-in periods between 1 to 5 years, but you may be able to get your money back if you’re willing to bear the exit load cost. Fixed deposits, on the other hand, usually don’t have lock-in periods (except tax-saving ones); they are highly liquid, and you can get your money back any time you want.
How Much Risk are You Willing to Assume with Your Money?
Mutual funds are linked to the market, which means they will make or lose money based on how the market is doing. While the returns are fantastic when the market is doing well, there’s a chance of loss when the market dips. Fixed deposits, on the other hand, do not depend on any external factors. You simply earn returns based on the interest rate your bank has fixed. This, of course, also means that returns are lower.
Do You Know How FD and Mutual Fund Returns are Taxed?
The difference between fixed deposit and mutual fund when it comes to return tax- Mutual funds are taxed based on short and long-term capital gains taxes. Fixed deposits, on the other hand, are taxed based on your tax bracket. It’s worth noting, though, that both have special tax saving options as well.
Also Read: Tax Saver Mutual Funds
Fixed Deposit Returns vs. Mutual Fund Returns
Fixed deposit vs mutual fund returns differ, mutual fund returns are based on the amount invested, whereas FD returns are based on the amount deposited (which is always pre defined). Returns of fixed deposits do not fluctuate, they are predefined and risk factor is not present. Whereas, Returns on mutual funds are not defined, they investors can face losses too, and the interest rate differs from bank to bank. Debt mutual funds vs fixed deposits debate is incomplete without the calculation of return rates.
Benefits of Investing in Mutual Funds
Investing in mutual funds depends on how much risk the investor is willing yo take. The profit majorly depends on the market condition and the value of particular security purchased with the invested money. The gain or loss is distributed among the investors. Mutual fund may sound like a high risk investment but returns are mostly greater than other plans.
Top advantages of mutual funds include- low risk, diversification, economies of scale, and liquidity.
Benefits of Investing in Fixed Deposits
Fixed deposits have been one of the most trusted ways to save money by millions of Indians. FDs have gained an enormous amount of appreciation and trust with time. FDs have evolved with time, serving the customers with easy path to invest and gain good interest amounts.
The top advantages of FDs include- fixed returns, easy investments, regular income, and tax-saving schemes.
Taxation: FD vs Mutual Fund
Difference between fixed deposit and mutual fund while both mutual funds and fixed deposits – yes, even debt mutual funds vs fixed deposits – are taxed under Indian income tax laws, both also offer tax saving options, albeit with non-negotiable lock-in periods.
Fixed deposits are taxed based on your income tax bracket once you cross over Rs. 10,000 in the interest earned on your investment in a year. Whether or not you fall in one, banks usually also cut a 10% TDS on the interest; this may be claimed during tax season if required, though.
Mutual funds, on the other hand, are taxed under both long-term and short-term capital gains taxation rules. Short-term capital gains taxes, also known STCG, are applied at 15%, while long-term capital gains taxes, or LTCG, are applied at 20%.
3 Non-Negotiables When Planning Your Investment Journey
Still wondering how to make the choice that will work for you? Here are 3 non-negotiables you should clearly chart out when it comes to planning your investments.
What are Your Short and Long Term Financial Goals?
Are you saving for a fancy vacation or to travel the world in a hot air balloon in eighty days? Do you want to marry your partner in a lavish wedding ceremony in a few years? Do you want to help your parents be ready for retirement or buy a house?
Knowing your goals – and how much money you need to get there – can clarify how much you need to invest and how much time you have to make that investment grow for time-sensitive goals.
How Long Do You Want to Invest For?
This is closely related to the first point. If you want to go on that vacation six months from now, your investment plan will be tailored to that time frame. On the other hand, if that wedding is five years away, or your parents are retiring in twenty years, you’ll make your investment choices accordingly.
How Much Risk are You Willing to Take?
Young investors, for example, often have fewer financial responsibilities and commitments and a long career ahead of them. This allows them to invest while keeping long-term goals in mind, and even take greater risks for greater rewards. Older investors, on the other hand, are likely to choose safer and more stable options like fixed deposits.
Of course, there is no universal law when it comes to investment; once you determine your financial parameters, you’ll have an easier time making the right choice for your investments.
Market-linked investments such as mutual funds generally offer higher returns but with higher risks, while FDs are steady investments with low risk and relatively lower returns. A good investment option that occupies the middle ground between these two risk appetites is a debt mutual fund.
This article should now have clarified the fixed deposit vs mutual fund debate and help you understand difference between fixed deposit and mutual fund, to decide which is the best option for you.
Depending upon your risk appetite, you can choose which instrument works best for you. Investing in FD is risk-free, whereas investing in mutual funds isn’t completely risk-free.
SIP is considered a better investment instrument if you are seeking for higher long term results and advancement in diversification.
Yes, FD is considered one of our country’s most trusted investment instruments. With time it has been booming as there is zero risk and interest is gained after completion of the tenure.
Debt funds are considered a better investment option than FD because of the added taxable income by the bank. Debt funds are invested in the market where the investor’s money is at stake and depends upon the market stability, but the gains are huge if the money is invested correctly.
Mutual funds are safe if you completely understand where you are investing. Short-term fall backs can be seen, but long-term benefits should be focused on.
Mostly mutual funds pay yearly. Although, certain exceptions are present if the investment is made primarily on motor vehicles, where the monthly interest can be seen.
FD and mutual funds are two different kinds of investment instruments. A mutual fund provides returns on the amount invested, whereas FD has a predetermined deposit which needs to be made monthly/or on the predetermined date.
A savings account is considered one of the best investment instruments as there is no risk present and the minimum interest is at least 2-4%. Certain banks provide more interest as well. There is no role of market fluctuation in a savings account.