Finance

Fixed Deposit vs Mutual Funds- Know About Before Investing!

Fixed Deposit vs Mutual Funds

Choosing between investing in mutual funds and fixed deposits for one’s portfolio can be challenging. Both offer unique characteristics, advantages, eligibility requirements, market risks, and other aspects. Fixed deposits are exposed to virtually no market risk and can be easily calculated by using fixed deposit calculator tool, in contrast to mutual funds, which are vulnerable to market effects. Individuals can engage in mutual funds through fund houses or asset management organisations. On the other hand, banks offer fixed deposit services to their customers. 

What is a Fixed Deposit?

Fixed deposits are investment instruments that offer a fixed interest rate for a fixed period. It is a service offered by most banks and non-banking financial companies. A set of interest rates are determined at the beginning of the tenure. Several fixed deposits promise a fixed interest rate to the investor and the best part is that Fixed Deposit maturity amount can be easily calculated by using fixed deposit calculator tool and also bank and NBFC offers higher senior citizen fixed deposit interest rates to senior citizens.

What is a Mutual Fund?

Mutual funds are financial instruments that are created by pooling money from a variety of investors and are managed by asset management companies. Investors in mutual funds own shares of stock and bonds of a selected portfolio of stocks and bonds. A mutual fund provides investors with various investment options based on their financial needs. It is important to understand that equity mutual funds invest primarily in the stock market, while debt funds invest in money and bonds. 

Listed below is the comparative analysis of FD vs Mutual Funds

Returns

An FD offers a guaranteed, fixed rate of return that can fluctuate between 6 and 8%. On the other hand, mutual funds do not have a fixed rate of return as opposed to an individual investment. A mutual fund’s returns are variable and depend on several factors, including the type of fund, the market performance, the duration of investment, etc. In the long run, equity mutual funds can offer 12 to 13% returns, while debt mutual funds can provide returns of 7 to 9% over a set period.

Process of investing

A bank or NBFC can offer you the ability to open a fixed deposit account. You must also open one fixed deposit account at a time to make a lump-sum contribution. On the other hand, it is worth noting that mutual funds can also be purchased directly through the fund house or indirectly through a broker. A mutual fund can offer options of two investment approaches – lump sums or Systematic Investment Plans.

Taking withdrawals

In terms of liquidity, FDs are not the best option. They have a fixed tenure, and any pre-withdrawals are subject to a penalty. On the other hand, mutual funds offer high liquidity, and there are no penalties on early withdrawals. However, an exit load may involve when you redeem your funds at the end of the transaction. The interest you pay on your FD will be added to your income when it reaches maturity. The amount of tax that you pay depends on your tax slab. There is a slight difference in the taxation of withdrawals from mutual funds. Capital gains are taxed based on the duration of your holding period.

Risk

An FD offers a guaranteed return, so its risk is almost non-existent. Because you can calculate maturity amount before investing using fixed deposit calculator tool. In contrast, mutual funds have different degrees of risk depending on the asset class, the investment term, and the market fluctuations. There is no guarantee of the return on investment, and the returns can fluctuate over time. However, it is important to note that mutual funds offer better returns than FDs.

Conclusion

A fixed deposit scheme provides guaranteed returns and can be calculated using fixed deposit calculator online, while a mutual fund is subject to risk if the market changes. Mutual funds offer good investment options in a declining interest-rate environment if you understand your level of risk tolerance. 

Mutual funds enjoy tax advantages compared to FDs due to their indexation benefits. Making informed investment decisions requires you to evaluate your financial goals and your level of risk tolerance.

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