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Which Investment is Better- Fixed Deposits or Unit Trusts?

Fixed deposit accounts are a great way to invest in a lump sum amount for a short period of time. But when we talk about long-term investments, these interest rates are considerably low. There are various Non-Banking Financial Companies (NBFCs) which are providing the services of fixed deposit and are offering better interest rates. These come with the tenure from one year to five years. Banks and other financial institutions offer even shorter withdrawals but that is pretty helpful.

On the contrary, a unit trust investment company takes the money from the investors and then invests them optimally in shares of selected companies which are listed on stock exchanges around the world. A unit trust involves lower risk as the market experts are involved and they are the ones who are taking care of your funds by investing them in the most appropriate manner.

Unit trusts (UT) do not come with a fixed term. Under UT, you can buy in and leave the time you want. However, it is advisable that under UT you plan to invest for more than five years as the market is unstable and fluctuates. There are many financial institutions which offer UT. However, the concept of FDs is more popular in our country than UT.

Fixed deposit even today remains to be one of the safest forms of investment. Although, conservative in nature, fixed deposits offer steady income. Moreover, the returns are guaranteed. However, that is not the case with Unit Trust as your funds are placed carefully they are not entirely risk-free. An investment in Unit Trust can fall victim to a fluctuating market condition. We can compare FD and UT based on several points:

Returns: Under fixed deposits (FD) the returns are guaranteed and vary from 4-9%. However, you must make sure that the interest you are earning is not compound and rather simple. The Fixed Deposit is designed in such a way that they help you save a lump-sum amount in order to meet your future needs. On the contrary, the performance of Unit Trust is not guaranteed. The returns are directly related to your allocation of funds and assets. Market movements affect the returns to a great extent.

Fees: FD requires the investors to have a minimum balance requirement. You might be penalised if this condition is not met. There are various fees involved in fixed deposits such as withdrawal, deposits, etc. The fees under Unit Trust are classified based on Adviser, Management, and Administration. Before investing in UT, it is essential that you get a detailed explanation about the same.

Security: Under fixed deposits, the degree of protection of capital is high. The funds, thus, invested in FDs are safe and insured regardless of the market condition. Unit trust, on the contrary, does not offer any capital protection. Security can be achieved only through the proper allocation of assets and diversification.

Accessibility: Fixed Deposit accounts tend to charge penalties if you decide to break the FD. Premature withdrawal is not encouraged. However, Unit Trusts provide full liquidity and can be accessed without any penalties.

These are few of the points that you need to consider when you are deciding which mode of investment you want to go with. Both have their own benefits and drawbacks and thus you must choose carefully.

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. John

    September 13, 2017 at 1:10 pm

    I think this article is one of the best, you describe here amazingly the difference between fixed deposit and long-term investments. It’s really helpful for making the right decision. I meet the peoples and they sometimes confused how to invest money. But your article provides depth information. Thanks for it

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