Mutual Fund vs. Fixed Deposits: Comparing Investment Options

2024-08-02

873 Views

Locate branch

Resume journey

Pay Premium

Mutual Fund and Fixed Deposits are both viable options for investment in India. Both options are suited for investors to accomplish their financial goals. A bank FD or a fixed deposit is a fixed income instrument and has been India's favorite for a while. Most families resort to a fixed deposit for their emergency savings. While a segment of the population of our country prefers investing in the best saving plan over both of these options.

Mutual funds, on the other hand, have often been viewed with suspicion in India. The reason is that most middle-class families do not have a good risk appetite for investments. The common belief amongst Indians is that mutual funds can lead to a loss of money. A SEBI survey shows that Indians prefer fixed deposits to mutual funds.

To bust related myths below is a comparison of fixed deposits versus mutual funds.

What is a Mutual Fund?

Mutual funds give a return on the amount invested. These are market-based instruments and give better returns in the future. Mutual funds do not have a fixed return and have risk factors. This makes them an uncertain option for middle-class families as they have no guarantee of return on their investment.

What is a Fixed Deposit?

A fixed deposit gives returns on the money deposited in banks. The returns are guaranteed in fixed deposits as there is no risk. The Reserve Bank of India fixes the return rate. The biggest disadvantage of a fixed deposit is the inflation rate. As inflation keeps increasing, there is hardly any adjustment of the returns in an FD.

Mutual Fund vs. Fixed Deposit: A Comparison

Both fixed deposits and mutual funds have their benefits. These saving and investment instruments are curated for people with different risk appetites and should be treated as such.

1. Returns on Investment

Most Indians find fixed deposits to be favorable as it involves no risk. The returns in a fixed deposit are guaranteed and adhere to the bank's fixed rate, regulated by the Reserve Bank of India. Moreover, the trend has shown that interest rates for fixed deposits decrease with time.

On the other hand, a mutual fund gives a much higher return on investments. The mutual fund acts as a tool for wealth creation as well as savings. It can help you grow your income steadily, without you having to work for it.

Unlike fixed deposits, mutual funds do not give any assurance of returns. The returns depend on the performance of the market. However, there are more options in mutual funds, such as debt mutual funds, which minimize the risk factors.

Understand the difference between Guaranteed Returns and Assured Returns.

2. Inflation adjustment on the returns

Inflation refers to a continuous rise in prices, which reduces the value of money over a period. It is calculated in percentage change.

Fixed deposits do not adjust the inflation rate as the rate of interest is decided beforehand. The real return received from your fixed deposits is reduced due to inflation.

Mutual funds are adjusted with inflation rates which gives you a better return on your investment. These help to beat inflation, especially if you invest in stock mutual funds. However, stock mutual funds also come with considerable risk factors.

3. Tax benefits and liabilities

The returns on fixed deposits are taxable. This depends on the income of the individual and the tax slab of the individual. However, mutual funds are liable to taxation depending on their holding period. Moreover, short-term profits and long-term profits are treated and taxed differently.

For instance, in mutual funds, if you make a profit before the year ends, you fall under short-term capital gains tax. For FD, the tax will be deducted at the source for the financial year 2020-2021. The investor is liable to pay tax if their interest exceeds five thousand rupees.

Post-tax returns determine the strength of an income instrument. All seasoned investors calculate the post-tax returns before investing in a suitable income instrument.

4. Withdrawal of invested money

A fixed deposit imposes a penalty on the premature withdrawal of money. If money is withdrawn before the maturity of the lock-in period, it considerably reduces the interest rate.

Mutual funds, however, are an open-ended instrument and therefore are more flexible with the liquidity of assets. You can withdraw your money anytime from a mutual fund as they are highly liquid.

Click to use : Compound Interest Calculator

5. Risk factors involved

Fixed deposits have no risk involved. The investor can safeguard their savings in the bank and get a small return after the stipulated tenure. However, fixed deposits are tax-deductible. This means that after the inflation rate and the tax is deducted, the amount received is barely adequate to achieve your financial goals. They are unaffected by the forces of the market.

Mutual funds are of three main types: debt, equity, and hybrid funds. These have different risk factors and are more flexible options for mutual funds. You can opt for a suitable option by assessing your financial situation.

People also consider investing in a ULIP over SIP. Because buying a ULIP, offers them a life cover along with an investment avenue. That way they can be assured that if something were to happen to them, their loved ones will be given the death benefit.

Understand the difference between a ULIP and a SIP.

How to invest in mutual funds and fixed deposits?

For fixed deposits, you can deposit a lump sum amount at a bank. The bank will give you an option for a lock-in period which could be anywhere between one to five years. Fixed deposits do not require any charges.

Mutual funds can be invested through a systematic investment plan (SIP) or depositing a lump-sum amount. Mutual funds have a one-time charge, and you need to pay for both entry and exit loads.

Smart financial planning in India needs to be upgraded. Most middle-class families believe that saving a part of their income is the only feasible solution. However, that is not the only option for investors. With the growth of fintech, India is looking at a positive future in investments.

Social media has helped amplify the awareness of mutual funds and fixed deposits. This foretells the future of smart financial planning for young investors. Apart from these options, you can also invest in savings plans offered by life insurance companies. Canara HSBC Life Insurance offers a wide range of saving plans that you can invest in for a variety of purposes. For example, the Guaranteed Income4Life plan offers guaranteed regular income to meet your post-retirement expense. It also protects you with a life cover along with giving you enhanced income for paying higher premiums. Buy the best saving and investment plan as per your risk appetite, financial goals, and requirements.

FD vs RD: Difference Between Fixed Deposit and Recurring Deposit

Difference between portfolio management and financial planning

Financial Planning - Top Selling Plans

We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.