Mutual funds refer to the collection of market-based investments such as bonds, stocks, and funds. On the other hand, FDs are investments that accounts operated by banks and NBFCs, and are independent of market conditions. Fixed deposits are often considered to be the safest form of investment. When it comes to saving, not many people will think of anything else except fixed deposits, as people consider them to be risk-free.
Banks, as a rule, offer security to people’s hard earned money. Thus, while investing, people have faith in the ability of the bank to keep their investment secure in a fixed deposit. The banks not only do that but they also benefit the investors by rewarding them with interest income through higher interest rates.
Here are a few points to be kept in mind before choosing where to invest your money:
- Investment: FDs might look pretty attractive on the paper but Tax Deducted at Source (TDS) is charged at a prevailing rate of interest. Thus, with the passage of time, more tax has to be paid on the income derived from FDs. One might also face loss in FDs primarily due to inflation. Inflation currently is on a low, thanks to measures taken by the government, but on the same page, the interest rates offered in FDs have fallen down too. Mutual funds, on the other hand, are affected by market volatility and have a high level of risk. Fund managers do their best to not only protect the investment but grow it too, but they are not always successful in the face of market peaks and lows.
- Returns: The returns on fixed deposits are pre-determined and these do not change till the tenure gets over. Mutual fund rates, on the other hand, are affected by the market condition. Thus, when the condition of the market is positive, these funds have the potential to earn returns which are way higher.
- Risk: Fixed deposits are majorly popular because of their low-risk nature. Equity mutual funds carry a higher risk than FD. Under mutual funds, debt funds carry lower market risk than the equity ones. The risks, however, can be taken care of, if careful professionals are managing your investments. At the same time, one cannot forget that higher risks yield higher returns.
- Tenure: Fixed deposit has a fixed time period and has liquidity which is low till the tenure of the fixed deposit ends. That is not the case with mutual funds as they have high liquidity. In the case of premature withdrawal, FDs are penalized, thus, charges have to be paid whereas under mutual funds only exit load is charged.
- Tax Status: One of the deciding factors between fixed deposits and mutual funds is that of taxation. Under FDs, the tax is levied on the current slab, it doesn’t matter what the tenure of your fixed deposit is. While under mutual funds, the tax deduction is dependent upon the fund’s category – short term, equity funds, long-term debt funds, etc.
A person having money to invest must refer to the aforementioned points before opting for either an FD or mutual funds. The decision whether to invest in a fixed deposit or mutual fund depends on many lifestyle criteria as well. The investor’s age comes into play, too. For instance, it is logical for a 50-years old man to invest in fixed deposits, as he would not wish to put his money at risk at such a late stage of his life. However, if a person is in his mid-20s or 30s, he will likely be more comfortable with handling risk and stress, and may thus opt for mutual funds. The risk taken will help him achieve higher returns whereas an investment in fixed deposit will help the 50-year-old man to sustain his income for the next 10-15 years.