Financial reform has become one of the most important elements of the fast-growing economy along with increased needs and expectations of the people. People not only want to save but also multiply their savings to meet their requirements. This is only possible through investments. There are a lot of instruments where you can park your money and let it grow. Now the major confusion arises, whether it is better to invest in Fixed Deposit or Mutual Fund.
Fixed Deposit is definitely one of the safest instruments where a person can fix his money and earn a fixed rate of return. But why not aim at higher returns?
In order to decide, which the better option between the two is, you need to first understand the difference between Mutual Fund and Fixed Deposit.
1. The meaning
A mutual fund is an investment option available to the investors where the money collected from them is invested in stocks, bonds or other types of investments.
A Fixed deposit gives you an option to deposit a lumpsum money in your bank for a fixed period at a specified rate of interest.
2. What returns can you expect
The Rate of return on Mutual Fund depends on the market fluctuations.
The Rate of return on FD is fixed depending on the period during which it is held in the bank.
3. Risk Factor
Risk Factor of Mutual fund depends on the type of mutual fund. Equity mutual funds have more risk associated with them than Debt mutual funds as they depend on the performance of the stock market.
Fixed Deposits, as mentioned earlier, are one of the safest instruments. However, there are risks associated with FD as well, for instance, there might be Bankruptcy situation when the bank might not have enough money to pay you back.
4. Can we diversify?
Mutual Funds help to diversify your investments as the funds are invested in different assets like bonds, equity, gold, etc.
Fixed Deposits do not help you to achieve diversification.
5. What about liquidity?
Mutual Funds are highly liquid as the investors can sell and redeem their investments anytime they want. However, an investor might need to pay exit load in case of certain mutual funds for withdrawing money before a given period of time.
Fixed Deposits are not liquid as the bank charges penalty for withdrawing money before maturity.
6. Pattern of investment
Money can be invested in mutual funds through SIPs starting from 500/-
Fixed deposits only give you the option of doing lumpsum investment.
7. How are they taxed
Tax on Mutual Fund is charged on the basis of the holding period- short term or long term.
Tax on FD is charged depending on the individual’s tax slab.
8. How long is the money locked
Mutual Fund provides a tax benefit scheme known as ELSS whose lock in period is 3 years
Lock-in period in case of Tax saving Fixed Deposits is 5 years.
Why should you invest in Mutual Funds? :-
If you don’t have sufficient money to invest in lump-sum, then you can invest in Mutual Fund where the investment can be done in SIPs starting from 500/- or 100/-. Mutual Fund is definitely riskier than Fixed Deposit. However, Christy Raedeke said, “If there is no risk, there is no reward”. If you have high income and high risk appetite, you must definitely invest in Mutual Fund and earn higher returns out of it. If you want to invest in long term tax saving scheme, then ELSS is a better option to choose as it will generate higher returns in the long run.
When to choose Fixed Deposit as an investment option? :-
Whenever you invest in Mutual Fund, you need to acknowledge the fact that the market is very uncertain. None of the investments are completely risk free. Fixed Deposits are undoubtedly less risky than Mutual Funds as they are government backed. However, in extreme occurrence in which a bank defaults or goes bankrupt, deposits can be insured upto 1,00,000/- only. You can choose to invest in Fixed Deposits if you’re planning to invest your money for less than 12 months considering the market performance for the past few years. Fixed Deposits being less volatile and less risky than Debt Mutual Funds, you can invest in Fixed Deposit for a short term goal.
Tax Saving Fixed Deposit being a debt instrument is safer than any equity based tax saving approach.
Hence, in short run you can invest in Tax saving Fixed Deposit to keep your money secure and earn a fixed rate of return out of it.
Where to Invest:-
Now considering these differences, you can decide which investment option you need to choose in order to attain your financial goal by evaluating your savings, your risk capacity, time horizon and financial goals.