Are Mutual Funds Better than Fixed Deposits?
For a long time, Fixed Deposits have played a central role in every Indian household’s saving strategy. As they offer fixed, guaranteed returns at a predetermined interest rate, they are viewed as a risk-free way of investing your money and growing your wealth. However, investment methods like mutual funds have been gaining much traction in the financial market for various reasons, with more investors transitioning from pure FDs to diversified portfolios for the long term.
Here, we compare Fixed Deposits with mutual funds to see which might be a better investment option for you:
|Mutual Funds||Fixed Deposits|
|Risk Profile||Mutual funds are influenced by changes in the market, which means there is an inherent risk involved. The extent of risk depends on the type of fund you choose and how much you invest. For instance, equity mutual funds are riskier because they invest a significant portion of your capital in the stock market. On the other hand, debt mutual funds are much more stable in terms of returns.||Banks and non-banking financial companies offer fixed Deposits as an instrument of secure wealth creation for the masses. The interest rates of FDs are unaffected by changes in the market, so your returns on maturity are guaranteed. Therefore, there there's little to no risk of any capital losses.|
|Returns||Your mutual fund returns depend on the type of fund you select (equity, debt, or hybrid) as well as market performance. However, the rate of returns is generally higher than that of FDs. For example, in 10 years, large-cap funds have provided an average annual return of 13 percent, whereas small-cap funds have provided around 19 percent.||Your returns in a Fixed Deposit are not dependent on any external factors such as market crashes or inflation. You will keep earning steady and fixed returns on the amount you have invested. The rates tend to vary between 6 and 8 percent.|
|Liquidity||Certain mutual funds come with lock-in periods during which you can't redeem the value of your units. After the period is over, however, you can withdraw any amount of money at any time without a charge. If you wish to redeem the funds during the lock-in period, you must pay the stipulated exit load.||Fixed Deposits typically have a lock-in period of 5 years. During this time, you can only withdraw the money by paying the penalty. FDs are not known for their liquidity as they are better suited for long-term investments.|
|Taxation||Mutual funds are taxed as per the gains. Short-term capital gains (STCG) earned from holdings less than three years old are taxed at 15 percent, while LTCG or long-term capital gains are subject to 10 percent if the earnings exceed Rs. 1 lakh. If you invest in debt funds, you would be charged 20 percent after indexation. However, funds like ELSS are intended for tax-saving purposes.||The interest you earn on FDs is entirely taxable. You have to add it to your annual income to be taxed per the slab that applies to you. The income should be reported under the section of ''Income from Other Sources'' when filing taxes.|
|Flexibility||Mutual funds are highly flexible because you can choose to invest in a variety of funds designed to accomplish specific purposes. You can also decide whether you want to invest in a lump sum or a systematic investment plan monthly, quarterly, or bi-annua||Your only choice here is to make a lump sum investment before the account gets locked in. FDs are straightforward, and there are no variations in terms of what the instrument can do. That's why there are no management costs involved when you open an FD.|
So, which of the two is a better investment option? That depends on multiple factors, including the investor’s financial goals, risk tolerance, and how comfortable they are with the stock market. One of the most beneficial aspects of mutual funds is that professionals manage them. You don’t need to know the market in-depth to take advantage of a fund’s return potential. These days, it’s straightforward to track any mutual fund’s performance and evaluate whether it aligns with your goals.
It might be better to view these two options as diverse. Fixed Deposits are safe, risk-free, and offer a decent interest rate that will help you slowly but steadily increase your wealth. On the other hand, mutual funds provide you with a variety of investment options based on your needs. They also boast a high return potential, especially if you opt for equity funds. However, since the returns are linked to the market, mutual funds carry an inherent risk. Before you decide to invest, assess your short and long-term goals along with your risk tolerance and make sure to diversify your portfolio.