As a prudent investor, it is important that you cross-check information and devise an investment strategy by taking everything into account. When it comes to choosing between mutual funds or investing in fixed deposits, weigh your options carefully. Here’s what you need to know.
A few months ago, financial and economic news websites were rife with the prediction that the Sensex was close to touching a high mark of 40,000. This information saw many investors buying shares and mutual funds. In such moments, it is easy to get carried away without examining how much risk we are able to bear. A common mistake to forget to weight all your options. For instance, deciding which would be a better investment—fixed deposits or mutual funds—requires careful deliberation.
Here, we will juxtapose both investments by asking basic questions, so that you can decide which one is best for you.
Q1. 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.
• Mutual funds are basically of two kinds, namely equity and debt.
Q2. 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.
Q3. 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 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.
• So it is more prudent to stay invested for a longer term to avoid depreciation of capital.
Q4. 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 and other 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 someone who wants to make a safe, low-risk investment, it is better to opt for fixed deposits. Bajaj Finance's fixed deposits offer stable and assured returns with the best interest rates.They also offer the convenience of opening one online, with the click of a button.
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