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Which Should You Choose, Mutual Funds or Fixed Deposits?

When planning for retirement or investments for other needs, there are two main factors that investors consider  – returns on investment and risk factor. Which factor takes precedence depends on your age, financial status, mindset, your ability to take risk etc.

Mutual Funds

Mutual Funds are pooled investments managed by finance professionals. These professionals choose the type of instruments to invest in, the companies to invest with, the term to invest for, and make other such decision on behalf of investors who have contributed towards the fund.

Equity mutual funds invest in equity funds which are subjected to higher fluctuation and risk than debt funds, but also have the potential for higher returns. Which type you invest in depends on your preferences and needs.

Fixed Deposits

Fixed deposits are savings instrument that provides a relatively low yet assured returns on your deposits. You can open fixed deposits in banks, NBFCs, and even in corporate FDs. These deposits are held for a fixed tenure and generally the interest rate is specified at the time of the deposit creation. This is fixed and is not subject to market fluctuations. You will get back the principal amount plus the interest at the time of maturity.

Difference between Mutual Fund and Fixed Deposit

As investment options, each carries its own advantages and disadvantages:

  • Mutual funds are risky, yet have the potential to yield high returns on investments
  • Fixed deposit involve almost nil risk, but the RoI is very low compared to other types of investments
  • Fixed deposits are taxable at the rate applicable for your tax slab, which can be as high as 30%
  • Mutual funds, if short term, are similar to FDs. However, long-term investment gains are subjected to a fixed 20% after indexation
  • Mutual fund dividend earnings are tax-free
  • Fixed deposits involve TDS payment unlike Mutual Funds
  • Some long term Fixed Deposits might be hard to break prematurely, and premature closure of FDs involves penalties and loss of interest
  • Mutual Fund units can be redeemed without a penalty after a minimal lock-in period

So Should You Invest in Fixed Deposit?

Mutual funds, though risky, provide higher returns that can help beat inflation and offer other benefits. Yet, fixed deposits are still viable savings options. When you create an investment portfolio, even if you are in a high-income group and are young, you would probably want to ensure the safety of a certain percentage of your funds. The rest can be invested in high-growth instruments that involve a certain element of risk.

For the percentage of funds that you want assurance for, fixed deposits are the best option.

Bank and NBFC fixed deposits are governed by strict RBI regulations. So, your FD principal amount remains safe, and you are also guaranteed of the interest amount at the time of maturity. Even corporate FDs, though not governed by RBI, can be safe if you choose investments rated safe and stable by credit rating agencies like CRISIL.

As for liquidity, you can take loans against most FDs and this helps you avoid penalties and loss of interest. If you are at lower tax slabs, the tax on your interest earnings might not make much difference. If you are in the tax-free slab, you can even avoid TDS by submitting Form 15G or Form 15H.

You can invest in fixed deposits and get high return by  Special Term Deposits. You can also choose to reinvest your periodic interest payments to increase your returns on the deposit.

There are many options in FD types. Review different fixed deposit schemes and use FD calculator for calculating maturity amount to find the amount you will get from investing in a particular scheme. Split your funds across different FD schemes to optimize earnings and liquidity.

Ultimately, whether you invest in Mutual Funds or Fixed Deposits depends on your capacity to take risk and whether you are looking for higher returns or security for your funds.

Written By

Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog.

1 Comment

1 Comment

  1. Pooja Desai

    December 19, 2018 at 6:54 am

    Nice article! In recent years, owing to increase in competition in the Banking sector, many banks have started to roll new schemes which combine the features of 2 or more deposit schemes and these are given different names by different banks.

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