Mutual fund v/s fixed deposit; both are popular investment choices. However, each financial instrument is different and offers investors attractive rewards over time.
It’s normal to feel anxious when you first start your savings journey. As a new investor, you may have many questions about how to get started, what to invest in, where to put your money, return on investment, and tax obligations. Of course, each financial instrument pursues different ultimate goals. However, the most popular choice among investors is fixed deposits and mutual funds. So the next obvious question is whether a mutual fund or fixed deposit is the better.
If you want to invest in one of these financial instruments, you must thoroughly analyze the two. Following is a comparison between mutual funds and fixed deposits. But before we compare the two, let’s look at each financial instrument separately.
Key differences between mutual funds and fixed deposit
As the name suggests, FDs give investors a fixed rate of interest for a certain period. The duration of an FD can vary from seven days to ten years. Interest on bank FDs is compounded which means you get interested in the interest that has already been accrued.
Some leading banks have now revised the interest rate in 2022 and are offering the highest interest rates of 5.25% – 6.25% p.a for 5 years.
A mutual fund is a financial vehicle that invests in securities such as stocks, bonds, money market instruments, and other assets by pooling money from many investors. Professional money managers manage mutual funds, allocate assets, and generate capital gains or income for the fund’s investors. The portfolio of the mutual fund is built and managed in such a way as to meet the investment objectives stated in the prospectus.
Now that we have explained the meaning of fixed deposit v/s mutual fund individually, let us go through the basic differences between them.
| Criteria | Mutual Funds | Fixed Deposit |
| Safety | Mutual funds are subject to market risk. Depending on the investor’s ultimate goal and risk appetite, different programs are available with different risk profiles. | On the other hand, a fixed deposit is a safe vehicle for risk-averse investors. |
| Returns | The returns of mutual funds are directly linked to the market in which they invest and are completely dependent on the performance of the stock market. | Fixed deposits provide guaranteed returns with a predetermined rate of return for a given period of time. |
| Expenses | Mutual funds have specific fees and expenses deducted as part of fund management. This means that the fees paid to the fund managers who manage the investor’s portfolio are one of the fees or expenses of investing in mutual funds. | Individuals who invest in fixed deposits, on the other hand, do not bear such costs because no intermediaries are involved in the investment process. |
| Risk | Mutual fund risk varies from fund to fund and is primarily determined by the market. As a result, investors can profit more if market conditions are favorable or lose a lot of money if they veer in the opposite direction. | Fixed deposits are generally risk-free investments because investors know exactly how much money they will get over time. Fixed deposit rates do not fluctuate and are not affected by market fluctuations or volatility, so investors can expect a consistent return on their money. |
| Withdrawal | Early withdrawals from mutual funds are permitted as long as the minimum holding period is met; however, they will charge an exit load of 1% of the fund value if the withdrawal is made before the holding period expires. | Depositors who want to withdraw their money will have to default on their FD and pay a penalty for early execution. |
| Taxation | Short-term and long-term capital gains taxes apply to all mutual funds. STCG is calculated at a flat rate of 15%, while LTCG is calculated at 10% on earnings above $1,000. In the case of debt funds, LTCG after indexation is 20%. | Any interest a person receives from a fixed deposit is taxed depending on which tax bracket you fall into. |
A mutual fund or fixed deposit which is better?
When comparing a mutual fund with a fixed deposit, it is clear that both financial instruments have a number of advantages and disadvantages. As a result, it is recommended that anyone interested in investing in one of these spend some time acquiring information that will help them make an informed decision.
Investing in mutual funds has certain advantages.
- It provides higher returns
- Your money will be handled adequately by fund managers with many years of experience.
- There are SIP (Systematic Investing Plans), SWP (Systematic Withdrawal Plans), STP (Systematic Transfer Plan), and other new investment and withdrawal techniques.
- It helps in diversification.
- It allows minimal investment through SIP thereby reducing the risk.
- One of the significant advantages of mutual fund investing is that when compared to fixed deposit mutual funds, FD interest rates are now hardly able to keep up with inflation. Due to the dramatic reduction in interest rates by the RBI due to the outbreak of COVID-19.
Conclusion
What works for one person’s financial goals may not work for another. It all depends on the investment horizon and the risk tolerance of investors. We would suggest investing in mutual funds for a long period of time, which will give the investor the power of compounding. In addition, it helps to diversify and reduce the risk associated with funds.
Consequently, whether you choose fixed deposit or mutual funds will be determined by your risk appetite and the type of returns you seek. When comparing fixed deposits with mutual funds, it is important to remember that there is no one-size-fits-all answer.
