FD Vs Mutual Funds – Where Should You Invest? ( Complete Guide)

FDs Vs Mutual Funds – Where Should You Invest? ( Complete Guide)

FDs(Fixed deposits) and Mutual funds are two very popular investment. Mutual funds considerably  invest in stocks, bonds and commodities and it provides returns as per the share market performance of the underlying asset. If you are willing to accept risk in exchange for potentially higher returns and have a long investment horizon, the Mutual funds could be more suitable.  On the other hand, FDs gives a fixed interest rate for a fixed term. If you priorities safety and stability, FDs a prudent choice, especially for beginners or retired people. Fixed deposits(FDs) are offered by banks or NBFCs, and Mutual Funds are offered by fund houses.

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What Is FDs (Fixed Deposits)?

The fixed deposit (FD) is a fixed-income instrument not affected by volatile market movements. The interest rate applicable when booking an FD is maintained throughout the chosen tenor. It is a savings instrument offered by banks and NBFCs where one can deposit the money for a fixed time period to earn higher interest rate than savings account. The investment ranges from 7 days to 10 years. 

A perfect tool to invest in if you have certain financial goals to fulfil in a stipulate time frame. It is one of the safest investment option available to date. Here the investors need not worry about losing the capital at all.

Benefits Of Fixed Deposits (FD)

  1. Guaranteed returns – FDs offers a guaranteed return on the investment, regardless of market volatility. The interest rate on FDs is fixed for the whole deposit time period.
  2. Higher interest rates – Compared to savings account, FDs typically provides higher interest rates, making them an appealing investment option for those who are seeking higher returns from their investment.
  3. Risk-Free FDs are risk-free because they are not subjected to market risks. Your principal amount invested in an FD is safe and secure and the interest earned is guaranteed.
  4. Flexible Time periodFDs have flexible time period options, ranging from a few months to several years. You can choose the time period or tenure that best meets your investment objectives.
  5. Liquidity FDs gives the option of premature withdrawal.  However, it may also result in penalty charges and a reduction in the rate of interest.
  6. Tax Benefits – Under Section 80c of the Income Tax Act, tax saving FDs are eligible for deductions up to a maximum of Rs. 1.5 lakh. Senior citizens also receives a tax benefit on the interest they earn on FDs.

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Who Should Invest in FDs?

People who may be interested in investing in FDs are :

  1. Investors don’t want to take risk : Fixed deposits (FDs) are considered as low investment options as they give a guaranteed return on the investment. Investors who don’t want to take any risk on their investment can do FDsFixed deposits are the best option for risk-averse investors.
  2. Individuals who have short term investment goals : With FDs you will get offers with various tenure options, ranging from few months to several years. So, if you are one of those people who have short-term financial goals can invest in FDs to get fixed rate of return for a smaller period.
  3. Senior Citizens : Senior citizens often gets higher interest rates on FDs from the banks. So, senior citizens looking for a safe and secure investment option with higher returns, can choose FDs.
  4. Taxpayers : Under section 80c of the Income Tax Act , tax saving FDs are under for the deduction up to Rs. 1.5 lakh. So you can save income tax by choosing FDs as a investment option.

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What is a Mutual Fund?

Mutual Fund is a market-linked investment vehicle wherein an Asset management company(AMC) pools the money of various investors. Based on assets a fund invest in they can be categorized into 3 main types – Equity funds, Debt Funds, and Hybrid funds. The AMC or fund manager managed the pooled investment and these fund manager are experts with in-depth knowledge about the complexities of the financial instruments and the mutual fund market.

Since mutual funds are market – linked investments, the return are not guaranteed. So you must always act in accordance with your risk appetite.

Benefits Of Mutual Funds

  1. Diversification Mutual funds invest in a diversified portfolio of stocks, bonds, or other securities, which helps investors reduce risk.
  2. Returns – The returns from mutual funds are market-linked. If the market goes up or do well and the fund manager’s bets work, they can provide higher returns than bank  FDs. However, if the market fall or fund manager’s bets don’t work, they can also give negative returns.
  3. Liquidity Mutual funds are generally easy to buy and sell. They are a flexible investment option that can easily adjusted to meet an investor’s changing need.  Mutual Fund provides financial flexibility and allow you to convert your investments into cash easily and quickly.
  4. Professional managed – Mutual Funds are managed by professional fund managers who have the expertise and resources to analyze investments and make sound decisions. Investors can thus take advantage from the expert fund managers.
  5. Access to different asset classes – Mutual Funds offer exposure to a wide range of assets including stocks, bonds and more, thereby diversifying your portfolio.
  6. Flexibility – You can invest in mutual funds in a lump sum or a systematic investment plan(SIP) for any time period. There is no maximum limit to investment. And it have the potential to generate attractive returns over time, allowing your money grow steadily.

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Who Should Invest in Mutual Funds?

  1. Who want’s high return – If you want to get higher returns than bank deposits, mutual funds are the right option for you. To get higher returns with mutual funds, you need to be patient and be prepared to tolerate some volatility of market.
  2. Diversification Seekers – When you choose mutual fund to invest in a wide range  of stocks, bonds and other securities, they are easy way to diversify your portfolio. So, if you wants a diverse portfolio, mutual funds can be a good option to invest and get good return.
  3. Long-term investors – If you are a long -term investor then mutual funds are the best option. That’s because over the long-term, they can give you much better returns than FDs. With long-term investment plan market’s volatility also gets smoothed out.
  4. Taxpayers Investment up to 1.5 lakh in a financial year in a tax saving mutual fund are exempt from tax. So with this you can make good return with tax savings.

Also Read: Top 10 Things To Know Before Investing in Stock Market

FDs Vs Mutual Fund : What is Good?

There is no single answer what is good between FDs and Mutual Funds. There are several differences and also both have their own benefits.

Investors who are risk averse and want a fixed returns with their investment can choose FDs. On the other hand, if you have long-term horizon of investment and want higher returns, then Mutual funds are a better option for you.

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