Fixed Deposit Vs. Mutual Funds: Which Is Better?

We have all come across the words fixed deposit and mutual fund. But when it comes to saving money, FD is the best bet. The fact that our grandparents and parents would have suggested investing our cash in FIxed deposits, the reason for the same is the lesser risk factor involved with the fixed deposits does not ensure that it is the sole option for investments. But with the rapidly changing fixed deposit interest rates, is FD still the best option, or should one opt for a mutual fund? Are you confused about which one you should opt for? Well, the article tries to throw light into which one you should choose.

Let us look at the broader range of differentiation between the two categories

Fixed Deposit Vs. Mutual Fund

The fundamental difference between the two
The basic comparison between the two is that while, fixed deposits entail one to deposit an amount of money in an account for a specified period over a fixed rate of interest, mutual funds, on the other hand, are investment mediums that are entirely dependent on the market and are prone to ups and downs.

In the case of mutual funds, one gets a large sum of money by the interest that the principal amount has gathered overtime after the specified time (known as the maturity period) of the deposit. There is no fixed rate of returns, unlike fixed deposits.

Market Dependency
The rate of interest is much higher in the case of fixed deposits than ordinary savings accounts. The returns are assured, and there is no risk of interest instability or loss of the principal amount. The most significant advantage of fixed deposits is that it remains unaffected concerning market fluctuations. But in case of mutual funds, one does not need to invest a large sum of money to get superior returns. One may invest a minimal amount, even as little as Rs. 500 or Rs. 1000. Mutual fund returns are said to give better returns in the long term. The performances are directly proportional to market growth. The higher it rises, the higher the returns.

Risk Factor
FD is considered to be a safer, stabler, and reliable option. One can if required, even withdraw the money deposited by paying a specific amount as a penalty. In the case of Tax Saver Fixed Deposits, one can also save tax while investing money. Tax benefits come under section 80C of the Income Tax Act, 1961. Investors may claim tax deductions under this scheme. Deciding to invest in a Mutual Fund or fixed deposits should be determined by the risk-taking capacity of the investor. If the investor is willing to take financial risks and can be prepared to wait for long term results, mutual funds are the right place to invest. For the ones who want to play it safe can safely invest in a fixed deposit scheme. 

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We are unfolding every little detail for you. Minute expenses are valid in case of mutual funds. There would be a particular fund manager who will take care of your funds. So, investors will need to pay fees while managing the funds. On the other hand, fixed deposits are self-investment schemes and more flexible. You can keep the amount locked up and later rest.

Impact of inflation
There is no change in the rate of interest of FDs concerning increase as the price is pre-decided, whereas mutual funds are very much affected by the rise and fall of inflation. For instance, you have made an investment of 6% in fixed deposits, and the rate of inflation is 7%, the adjustment on the same is negligible of 1%.

FD is not at all liquid as the money invested has a specific lock-in period. On the other hand, MF is much more liquid as there is no particular lock-in period, and you can sell off the funds within a short period without much depreciation.

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Both the investment options come up with a locking period. People can happily take away the money along with the returns. However, in some cases, if you wish to break the plan before the maturity period, there are pre withdrawal charges in case of both investment plans.

As mutual funds are expected to give us more gain and returns. On the same stance, they are also likely to provide us with a long term capital gain tax. On the other side, if we will look at a fixed deposit, if the interest income exceeds 10,000, we can get a tax up to 10%.

These are just some of the essential points to look out for before arriving at the best option for you. Also, other aspects to differentiate between the two are taxation and tax savings. However, choosing the best one depends on one’s risk-taking ability and the surplus amount one will like to invest.

Some extra perks related to fixed deposit and mutual funds 

Fixed Deposit
In the case of an FD, it is considered to be very suitable for senior citizens, as they can avail of the FD plan at a lower rate of interest. Also, they have an alternative to get a tax redemption, as per Section 80 C.

Mutual Fund
In the case of a Mutual Fund, there are various options for payment plans like Systematic Transfer Plan, Systematic Investment Plan, and Lump Sum Plan.

People should always look and check their portfolio while making an investment choice. 

Depending on the risk factor, I am paying capacity, income, risk-averse, and many other factors an investor can make the right choice.

People who want to play safe should go for a fixed deposit. Yet people who are ready to take some degree of risk can opt for a Mutual Fund. 

In some cases, a mix of equity and debt funds can also make the right combination. Also, an FD is like a personal Peggy pouch that comes attached to savings. 

As per the recent graph, start your investment journey as early as your first salary.