Fixed Deposit and Mutual Funds, both a popular investment instrument in India. Most Indians prefer investing in Fixed Deposits as they are safe and offer an assured return and are not subject to market volatility. Mutual Funds (MFs) on the other hand, get affected by market risks. However, Mutual Funds are managed by experienced fund managers who don’t only protect them but also make them grow.
So which is the best option you have? Read on to know exactly that.
For Indian investors, Fixed Deposit (FD) is the traditional investment instrument offered by banks and NBFCs. The interest rate offered by FD is considerably higher than saving accounts and it stays fixed throughout the tenure.
The tenure is also pre-specified meaning you can fix your money for 1 year, 2 years, 5 years, and even more than that. The higher this tenure is, the more is the interest rate.
Fixed Deposits are secured. They are covered under Deposit Insurance and Credit Guarantee Corporation (DICGC).
All sound good…right? There are drawbacks with FDs as well. You cannot withdraw your money before maturity. Banks and NBFCs charge a penalty, if you do so and you also lose out on the interest. Consider this example to understand better.
Suppose you invested Rs.1 lakh in an FD at 9% per annum for a tenure of 5 years. However, due to a medical emergency, you had to withdraw the money after 4 years. The interest you earn is the interest for 4 years, the rate being whatever the rate was for those three highers (not the predetermined one). Say, that rate is 7%. So you lose 2% on your returns for 1 year along with the penalty that you need to pay for premature withdrawal.
Mutual Fund is a huge pool of money where numerous investors invest. The interest rate depends on the performance of the market and you have the freedom to sell your shares whenever you want.
Each of the funds is managed and monitored by experienced and qualified professionals. They use this money to create a portfolio that can consist of stocks, money market instruments, bonds in any combination.
You as an individual investor, own shares of the mutual fund and not the securities. You can invest small amounts of money and regardless of that amount, you enjoy the profit earned by the entire fund. Every investor shares the gain or loss equally in the proportion they invested money in the case mutual funds.
While there is risk involved, you can invest across a large number of securities to diversify your portfolio in order minimise the risk.
What to Choose?
After knowing the difference between Fixed Deposits and Mutual Funds, what do you think you should invest in?
One of the most important things you need to consider when making a decision, is the tax factor. When you invest in Fixed Deposit, the tax levied depends on the present tax slab and not on the tenure of your deposit. However, with Mutual Funds, the tax depends on the category. 15% is the rate for short-term equity funds while long-term debt funds are taxed at 10% without indexation and 20% without indexation. Short-term capital gains will be taxed based on your tax slab. This means MFs are tax-friendlier as compared to FDs.
At the end, it completely depends on your risk capacity, on what to invest in. When investing in FD, use FD calculator for calculating maturity amount to know the exact amount you’ll earn. This isn’t possible with MFs and that a risk that you need to take.
If you want to play it safe, invest in FD and if you are hopeful of the possible returns, then MF is what you need to go for.