Mutual Fund vs Recurring Deposits: Understanding Your Savings Options

Learn about the differences between Mutual Fund vs Recurring Deposits to make well-informed financial choices.
Mutual Fund vs Recurring Deposits
3 min
08 March 2024

There are various options for investing your money, with mutual funds and recurring deposits being two popular options. Mutual funds offer various advantages like good potential of growth, diversification and lower starting amount. Recurring deposits provide benefits such as low minimum investment requirements, higher interest rates, and flexible investment durations. Before deciding on either or both of these options, it is important to understand key aspects associated with each.

What are Mutual Funds?

Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers, who make investment decisions on behalf of the investors based on the fund's objectives. Each investor in the mutual fund owns shares, which represent a portion of the holdings of the fund.

Mutual funds offer several advantages to investors, including diversification, professional management, liquidity, and convenience. They allow investors to access a broad range of securities with relatively small amounts of money, making them suitable for both beginner and experienced investors. Mutual funds come in various types, including equity funds, debt funds, hybrid funds, etc. Each catering to different investment goals, risk tolerances, and time horizons. Overall, mutual funds provide an accessible and efficient way for individuals to invest in the financial markets and achieve their financial goals.

Key Features of Mutual Funds

  • Diversification: Mutual funds invest in a variety of securities, such as stocks, bonds, money market instruments, etc, spreading the investment risk across different assets.
  • Professional management: Mutual funds are managed by experienced fund managers who make investment decisions based on thorough research and analysis, aiming to achieve the fund's stated objectives.
  • Liquidity: Mutual fund shares can be bought or sold on any business day at the fund's net asset value (NAV), providing investors with liquidity and flexibility to access their investments when needed.
  • Affordability: Mutual funds allow investors to participate in diversified portfolios with relatively low initial investment amounts, making them accessible to a wide range of investors with varying financial capacities.
  • Transparency: Mutual funds provide regular updates on their portfolio holdings, performance, and expenses, enabling investors to make informed decisions about their investments. Additionally, regulatory requirements mandate disclosure of key information to ensure transparency and accountability to investors.

What are Recurring Deposits?

Recurring deposits are a type of savings scheme offered by banks where investors deposit a fixed amount of money at regular intervals for a predetermined period. At the end of the maturity period, investors receive the principal amount along with accumulated interest. Recurring deposits offer a safe and stable way to grow your savings.

Key Features of Recurring Deposits

  • Regular savings: Recurring deposits enable individuals to save a fixed amount of money regularly, typically on a monthly basis, fostering a disciplined approach to savings.
  • Fixed tenure: Recurring deposits have a predetermined tenure, ranging from six months to ten years, during which the depositor contributes a fixed sum regularly.
  • Fixed interest rates: Recurring deposits offer fixed interest rates throughout the tenure, ensuring a predetermined return on investment, regardless of fluctuations in market interest rates.
  • Low risk: Recurring deposits are considered low-risk investment options as they are offered by banks and the post office and are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to Rs. 5 lakhs per depositor per bank.
  • Flexible investment amount: Recurring deposits allow investors to choose the amount they wish to invest regularly, making it accessible to individuals with varying income levels and financial goals.

Difference between Recurring Deposits and Mutual Funds

 

Recurring deposits

Mutual funds

Investment purpose

Primarily used for savings and fixed returns

Invested for wealth creation and potential growth

Returns

Fixed interest rates

Market-linked returns, varying based on market performance and fund management

Risk

Low risk

Varies based on the type of mutual fund, ranging from low to high risk

Liquidity

Generally less liquid, with penalties for premature withdrawal

Generally more liquid, allowing investors to redeem units at any time based on NAV (Net Asset Value). Certain mutual fund schemes are subject to an exit load

Investment amount

Requires regular deposit (mostly monthly)

Flexible investment amounts, varying from low to high


Conclusion

Both mutual funds and recurring deposits offer unique benefits and serve different investment objectives. While mutual funds offer the potential for higher returns and greater flexibility with comparatively higher risk, recurring deposits provide safety and stability. Understanding your investment goals, risk tolerance, and time horizon can help you choose the right savings option to achieve your financial objectives. It is essential to consult with a financial advisor to make informed decisions based on your individual financial situation and goals.