Investors have different requirements, goals and risk appetite. Before investing, every investor must analyze their aim of investing, Risk bearing capacity, understanding about the financial market &products and their own financial status.
Fixed deposits or mutual funds both have their advantages and limitations. Understanding the difference between mutual funds and fixed deposits will help an investor to decide which one is a best suitable for them.
FDs are considered as the safest investment because of assured interest and principal on maturity. Bank deposits are insured under deposit insurance and credit Guarantee Corporation (DICGC) up to Rs 5 lakh which add on to this security feature. Banks are regulated by RBI and have a trust of investors since many decades. FDs are therefore very popular with conventional investors.
Mutual Funds are subject to market risks and do not give any guarantee of returns as provided by FDs. However, mutual funds diversify risks by investing in a portfolio of stocks & bonds. It is managed by the skilled professional. Mutual funds have many features like lucrative returns with reasonable risk, tax benefits, easy process of investment, liquidity etc. This has made mutual fund industry more promising and widely acceptable among the investors.
A big number of conventional investors who earlier preferred to invest in bank FDs started investing in mutual funds. Now Mutual fund has made a strong presence in India and constantly growing with a sound pace.
- Key difference between FDs and Mutual Fund Investments is tabulated below:
|Factors||Fixed Deposit||Debt Mutual Fund|
|Fixed Returns||FD interest rates are fixed, so the returns on them are also fixed.||Assured or fixed returns are not possible.|
|Constant interest during the tenure||Interest rates decided on FD do not change during the tenure. Therefore, return will be constant during the tenure of the deposit.||No constant returns can be received. Returns may be high and low or even negative during the investment tenure.|
|Linked with market||Returns are not affected by the market volatility.||Returns are affected by the market volatility.|
|Risk||There is no risk involved as the returns are fixed, and the principal invested is safe.||There is risk involved when investing in MFs; the risk level may depend on the type of MF.|
|Tax aspect||Interest on FD is taxed on accrual depending on the slab that the investor falls in.||MFs are taxed based on the holding period and taxed only at the time of redemption. Depending on the period, the investor could pay short-term or long-term capital gains tax|
|Lock in period||FDs can be used for tax saving under Section 80C; the lock-in period is 5 years.||The equity-linked saving scheme can also help in tax saving; lock-in period is 3 years.|
This comparison between FD and mutual fund illustrates that FDs give assured returns whereas mutual funds are subject to market risks and do not provide any guarantee on returns. If an investor understands the risk level &financial goals and invests accordingly, mutual funds can be good investment options in a declining interest rate environment.