Featured Image Caption: Difference between Mutual Funds and Fixed Deposits
Saving a substantial corpus for the future is what prompts most individuals into investing in different schemes. But the most prominent two among all the other investment opportunities are mutual funds and fixed deposits. Both of them carry specific investment growth formula suitable for either the risk-averse or risk-taking investor, catering to the whole range of the prospective investors in the Indian demography.
So, let’s take a look at both of these investment opportunities in brief.
Mutual funds: The easiest way to describe mutual funds is that it clumps investments made by multiple individuals and then invests it in another clump of investment avenues which may include bonds, stocks, money market instruments, and other assets. These funds are maintained by skilled fund managers who allocate the funds in different places to gain maximum profit. Mutual fund is not the same as shares; however, a section of the fund corpus may be invested in stocks.
Fixed deposit: In fixed deposits, a lump sum amount of money is invested for a specified period. Fixed deposits offer higher interests than a standard savings account. Funds invested are locked in for a specific period till maturity and disbursal of the funds.
- Cumulative: A lump sum amount is disbursed post maturity including the interest compounded on the total principal invested.
- Non-cumulative: The interest accumulated on the lump sum can be disbursed monthly, quarterly, half-yearly, or annually.
Now, to consider the investment growth formula of either these investment avenues, investors must consider multiple pointers other than just the expected RoI or return of investments.
Fixed deposits are a risk-free investment. Fixed deposit Interest rates don’t fluctuate as per the market. An investor is always aware of the final amount of maturity. On the other hand, mutual funds are entirely reliant on market trends. So, if the market is performing well, an investor will earn a lot more than their investment, and the chances of making less or losing money is also a reality. So, the risk quotient is very opposite when compared.
Fixed deposits offer more security in terms of investment than mutual funds. FDs are non-market-linked and therefore not susceptible to market fluctuations. Note that risks are a vital part of the investment growth formula.
To invest in a fixed deposit, an investor doesn’t have to pay anything extra than the amount they are investing. On the contrary, in mutual funds, investors have to pay some additional charges, which are a fee paid to the managers who manage the funds.
Fixed deposit investments can be a great source to generate income. If an investor opts for a non-cumulative FD, he/she can earn the interest monthly, quarterly, half-yearly, or annually. But mutual funds don’t provide this benefit. In mutual funds, the extra income is earned only when the fund is withdrawn. So, in this sense, FDs offer more accessibility than a mutual fund.
Know the income
With fixed deposits, investors are aware of what they will earn at the end of their investment term. But in case of mutual funds, investors are not completely in the loop when it comes to where and how the funds are being invested. Although this decision is best left for experienced fund managers, it is for a fact that the investor may generate sufficient returns or suffer losses. If an individual opts for a Fixed Deposit from Bajaj Finance, he/she is sure to earn up to 7.85% as interest, which is an assured earning. So it is better to move your mutual fund investments to an FD as it offers an assured return compared to mutual funds.
Fixed deposits offer more tax benefits when compared to mutual funds. Any FD that completes a lock-in period of 5 years comes under tax benefits mentioned in Section 80C of the Income Tax Act. Mutual funds also offer tax benefits based on their tenor and investment amount. But when compared, fixed deposits offer more tax benefits than mutual funds.
This FD vs mutual fund debate is not easy to resolve as they are two entirely different investment concepts. The decision here resides totally on the investor and his/her risk-appetite, as both of them offer two different sets of benefits.
So, it is tough to conclude, which is a better option for investment between mutual funds and fixed deposits. But comparing them purely based on their merit, it can be easily said that a fixed deposit has a higher investment growth formula in the long run compared to mutual funds.
By Gaurav Khanna
who is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends.