Fixed Deposits vs Mutual Funds - Know the Difference
As an informed investor, you must always cross-check information and devise your investment strategy after accounting for all different factors. It is easy to get carried away by viral news stories or current market trends when investing, but it is more important to evaluate your own needs and risk appetite before you invest.
As popular investment vehicles, fixed deposits and mutual funds have fascinated different investors. If you’re struggling to decide which would be a better investment-fixed deposits or mutual funds, it is important to weigh your options carefully and decide accordingly.
What are Mutual Funds?
- A mutual fund is where many investors come together with a common goal of increasing their money.
- Investment is made in equities, bonds, money market instruments and/or other securities.
- The income earned through these investments is then equally distributed among the investors. This is done after deducting the expenses incurred.
What are Fixed Deposits?
- In fixed deposits, there is no pooling of money by a group of investors. Instead, as the name suggests, it involves generating interest by keeping a sum of money fixed for a certain period or tenor.
- This tenor usually ranges from one year to five years.
- Fixed deposits are beneficial as the rate of interest paid is higher than that of a savings account.
- This interest, combined with the principal, is returned to you at the maturity period.
- You can invest as little as Rs.25, 000 in a fixed deposit with minimal documentation.
Also Read: What is a Fixed Deposit?
How Long Can One Stay Invested?
- Mutual funds have lock-in periods depending on the type of fund you choose, and you can exit when you wish to. Similarly, for fixed deposits, you can keep your money with the fund for 1–5 years.
- But, whether you opt for mutual funds or fixed deposits, you must remember that you will face certain disadvantages if you choose a very short term, i.e, less than a year.
- In case of mutual funds, any gains you make before the year ends are taxed as short-term capital gains tax. In the case of fixed deposits, if the interest earned exceeds Rs.10,000, tax is deducted at source (TDS) at the rate of 10% of this amount.
- It is more prudent to stay invested for a longer term to avoid depreciation of capital, in mutual funds.
What is the Degree of safety Involved?
- When you go to a public sector, private bank or a non-banking finance company (NBFC) to open an FD, you are informed about the rate of interest it will fetch on maturity, in advance.
- This rate of interest written is guaranteed and cannot be altered or changed.
- Although the interest you make in mutual funds may be higher than fixed deposits, there is no assurance that this will remain constant. So unlike fixed deposits, gains in mutual funds are neither constant nor uniform.
- This is because equity mutual funds are subject to volatility in the stock market. So, every mutual fund comes with a fine print, which states that investment in mutual funds is subject to market risks.
- The choice of whether you want to invest in a mutual fund or a fixed deposit is ultimately dependent on your risk appetite.
If you are looking for a safe, low-risk investment, it is better to opt for fixed deposits. Bajaj Finance Fixed Deposits offer stable and assured returns with the best fixed deposit interest rates. They also offer the convenience of opening one online, with the click of a button.
Difference between FD and Mutual Fund
- Return on Investment
- Rate of Return
- Risk Factors
- Impact of Inflation
- Tax Savings – FDs vs. Mutual Funds