Choosing Your Path: Mutual Funds vs Fixed Deposits - What's Right for You?
30 August, 2024
Synopsis
Mutual funds and fixed deposits (FDs) have distinct features in terms of returns, risk, liquidity, and tax implications.
Mutual funds offer potentially higher, market-linked returns and the flexibility to adjust your investment strategy. Since returns are not guaranteed, mutual fund investments are considered riskier than FDs. Fixed deposits provide guaranteed returns with lower risk and fixed lock-in periods.
The choice between mutual funds and FDs depends on investment objectives, risk tolerance, and time horizon. A hybrid approach is often recommended for balancing growth and stability in a portfolio.
You've worked hard and saved diligently. Now, it's time to make your hard-earned money work for you! But with so many investment options available, choosing the right one can feel overwhelming.
Two of the most popular choices for Indian investors are fixed deposits (FDs) and mutual funds.
How efficiently you create wealth from your hard money depends on where you invest it. A wrong step may end up getting you returns less than inflation; that is, the future value of your investment doesn’t effectively beat inflation. Simply put, you may end up with less money than you may need.
Let's try to solve the mutual funds vs fixed deposits dilemma using parameters like risk, return, liquidity, investment amount, etc., so you can make the right choice.
Mutual Fund vs Fixed Deposit
Category | Mutual Funds | Fixed Deposits (FDs) |
Definition | A professionally managed investment scheme that pools money from many investors to invest in a diversified portfolio of stocks, bonds, and securities. | A financial instrument offered by banks and NBFCs where money is deposited for a fixed tenure at a predetermined interest rate. |
Returns | Potential for higher, inflation-beating returns linked to market performance. | Guaranteed returns fixed for the entire tenure, unaffected by the stock market performance. |
Management | Managed by professional fund managers. | Not actively managed; interest rate is fixed at the time of deposit. |
Risk | Diversified across various securities, but returns are subject to market risks. | Low risk as returns are guaranteed, and principal amount is safe. |
Liquidity | High liquidity; easy to invest and redeem. Flexible options like lumpsum, SIP, STP, and SWP. | Moderate liquidity, but tenures are flexible from 7 days to 10 years. |
Investment Options | Various types of funds (equity, debt, hybrid, etc.) are available to suit different risk profiles and investment objectives. | Various types of FD options are available - Standard, Tax Savings, Special, Corporate, Regular, and Senior Citizen. |
Suitability | Suitable for investors looking for potentially higher returns and willing to take on some market risk. | Ideal for risk-averse investors seeking guaranteed returns and safety of principal. |
Tax Benefits | ELSS funds offer tax benefits under Section 80C; other mutual funds may attract capital gains tax. | Tax benefits under Section 80C, but senior citizens also get some exemptions under Section 80TTB. |
Accessibility | It can be easily invested in through various platforms and can be monitored online. | Available at all banks and NBFCs; fixed returns and maturity amounts are pre-determined. |
Mutual Funds vs Fixed Deposits: Key Differences
Feature | Mutual Funds | Fixed Deposits |
Investment type | Pooled investment in stocks, bonds, or other assets | Loan to a bank or financial institution |
Returns | Market-linked, Varied | Fixed, pre-determined |
Risk | Varies as per fund type, Moderate to High | Low |
Liquidity | High (some funds may have a lock-in period or exit load) | Moderate |
Expenses | Expense ratio charged (typically 1-2%) | No charges |
Lock-in | Open-ended, no lock-in | Lock-in based on chosen tenure |
Taxation | 10% LTCG above ₹1 lakh; STCG as per slab | Interest taxable as per slab |
Which is Better FD or MF?
Choosing between MF and FDs depends primarily on your investment objective, investment horizon, and risk tolerance. Mutual funds are more suitable for long-term objectives as they have the potential to deliver inflation-beating returns over 5-10 years or more. But you have to be willing to tolerate short-term volatility.
FDs are ideal for short-term needs as they offer guaranteed returns and capital safety. The fixed interest rate is usually in the range of 5-8%. For conservative investors who want capital protection, FDs are the best bet. Mutual funds are preferable for investors willing to take on some risk for higher returns.
One can also adopt a hybrid approach by investing a part of savings in FDs for stability, and the remaining in mutual funds for growth. This balances safety and returns. Mutual funds carry risks like the possibility of negative returns in case the market crashes. Assess your risk appetite and investment objective before deciding.
Mutual funds and fixed deposits both have their pros and cons. FDs offer the stability of returns and capital protection, while mutual funds provide the potential for inflation-beating returns over a long period, apart from the benefit of diversification. One is not necessarily better than the other. Your investment choice should be based on your financial needs and risk tolerance. For ideal results, consider having both in your portfolio.
If you cannot choose between FD and mutual fund, download the HDFC Bank SmartWealth App from Playstore/Appstore. This expert-created DIY app will help you make the right choice based on your financial objectives and risk appetite. Just go for it now to create wealth and realise your dreams!
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