What is mutual funds vs fixed deposits? We all have the fruits of our labor that we want to invest in the right channels, but there are countless options available. It can be hard to choose among so many. Today, I will be talking about two popular investment options that are often discussed among investors:
Fixed Deposits (FDs) vs Mutual Funds.
Ask one or two investors, and you’ll find that each has had different experiences with these channels. I’m going to talk about commonly discussed points that are objective and relevant, to help you make a conscious and safe choice. But before you can understand what a safe choice is, you need to first understand these complex terms: Fixed Deposits (FDs) and Mutual Funds.
What is a Fixed Deposit?
It is considered by many to be one of the safest ways to invest your money. Here’s how it works: you invest a lump sum in a bank, and it accumulates interest over a fixed tenure. Unlike mutual funds, which often fluctuate due to market risks relying on money pooled from a group of investors, a fixed deposit allows you to know the interest rate offered by the bank before you invest, keeping your money safe from external market influences.
What are Mutual funds?
A mutual fund is like a big pot of money, a massive piggy bank where a group of people pool their money together. This money is managed by a fund manager who uses their expertise to invest it in stocks, bonds, and other securities to help grow your savings. Once the investment yields the returns, the expenses incurred will be deducted and the rest will be equally distributed amongst investors.
What are the benefits of Mutual funds?
Returns:
If your goal is higher returns over time, mutual funds are a better option. Mutual funds typically offer average returns of 10% to 15% per year, while fixed deposits usually provide 6% to 7% annually. If you’re looking to make a quick buck from your valuable investments, pick mutual funds.
Risk:
Fixed deposits are usually a safer option if you want your investment to yield returns at a slower, risk-free pace. FDs carry no market risk, unlike mutual funds—which reflect the idea in legendary fund manager Peter Lynch’s quote: “The higher the risk, the higher the potential return — and the greater the potential loss.
Potential in Growth:
Mutual funds are like a seasonal tree – they grow well under the right conditions and can produce profitable returns. This is especially true if you’re aiming for long-term capital growth because stocks typically yield more than fixed deposits in time.
Liquidity:
If unforeseen circumstances force you to withdraw your fixed deposit early, the bank will hit you with a penalty, usually in the form of reduced interest. For instance, if you booked your FD at 7% for two years but decide to withdraw after one year, you may receive only 5.5% not the full 7%.
Tax Benefits:
If you invest in a five-year tax-saving Fixed Deposit (FD), you can get a tax deduction under Section 80C of the Income Tax Act. But keep in mind — the interest you earn from that FD is fully taxable based on your income slab.
On the other hand, Equity Linked Savings Schemes (ELSS), which are a type of mutual fund, also qualify for tax deduction under Section 80C.
The big benefit? ELSS is more tax-friendly. You only pay tax when you sell your investment, and even then, only if your profit is more than ₹1 lakh in a financial year. Profits up to ₹1.25 lakh are completely tax-free, and anything above that is taxed at just 12.5%.
Investment Preference:
If you are a busy person who wants to invest but doesn’t want to worry about the fluctuating market, then pick an FD. You invest and only need to remember it when the term ends. If you want to be more involved in managing your investments, then pick mutual funds.
What to choose? mutal funds vs fixed deposits
If you don’t want to worry and desire a risk-averse investment option, go with fixed deposits. But if you’re aiming for long-term wealth creation, mutual funds investment is the better choice for your needs.