Which is better for investing: fixed deposit vs Mutual Fund ? Everyone has this question on their thoughts. One is offering extreme safety with low returns and other is offering better returns with market risk. Which one to go for?
In this post, we will talk about all the aspects of both Fixed Deposit vs Mutual Fund in much detail.
Let’s understand it one by one:
Table of Contents
What are Fixed Deposits?
A fixed deposit is a lump sum deposit with the bank or financial institution. Fixed deposit is a safe investment as it offers fixed assured interest rate for a specific duration.
Fixed deposit investment duration varies from 7 days to 10 years. One can choose duration as per your own requirements.
What are Mutual Funds?
Mutual funds are investment scheme that pool money from various investors and the scheme invest the money in stocks, bonds and securities to generate profits.
Mutual funds generally carry less risk compared to individual stocks due to diversification. When you invest in a mutual fund, your money is spread across a variety of stocks (and sometimes other asset classes like bonds or commodities).
This means that if one stock underperforms, it may be offset by the performance of other stocks in the fund.
This diversification helps reduce the impact of volatility and specific risks associated with individual companies. However, while mutual funds can lower risk, they don’t eliminate it entirely. Market risks, sector risks, and fund management risks can still affect returns.
Read more about mutual fund
There are two ways to invest in mutual fund scheme:
- Lump Sum Payment
- Systematic investment Plan Or SIP
SIP stands for Systematic Investment Plan. SIP is a monthly payment scheme for a chosen time period.
SIP is not a scheme but it is a way to invest in mutual funds. One can choose investment duration and amount as per own choice.
For example, you have started Rs. 10000 SIP ( pay daily/weekly/ monthly/ quarterly/ yearly) mutual fund scheme for 10 years.
Read more about how to start Mutual Fund SIP investment : Mutual Fund SIP
Now a days one can buy SIP for income generation ( in future) also. Read more about it
SBI Mitra SIP – A Powerful Tool To Get Monthly Income
Comparision Between Fixed Deposit Vs Mutual Funds
Fixed deposit or Mutual funds are both popular investment schemes. But real nature of both products are completely different from each other.
Let’s compare both FD and Fixed Deposit on different parameters.
Safety
FD offers safe and secure fixed returns. The return and duration is fixed for Fixed deposit.
Pros: The interest rate is fixed and therefore does not change with time.
Cons: One had to pay a penalty and reduced return on premature withdrawal.
Mutual Fund returns are neither guaranteed nor fixed. Equity Mutual Fund investment can be risky in the short run. One can choose any duration as per one’s own choice.
Pros: One can withdraw money from a mutual fund anytime. Mutual fund provide higher returns in long run.
Cons: Withdrawal before a specified time may attract an exit load. Return is market linked.
Risk:
Fixed Deposit return is guaranteed therefore risk is low to negligible.
Pros: Risk-free investment, Assured returns
Cons: Low-risk investment provides low returns too. Fixed deposits offer low returns as compared to other investments.
Mutual funds are market-linked investments, meaning their returns fluctuate based on market performance.
Just as fixed deposit (FD) interest rates vary across banks and tenure, mutual fund returns also differ from one scheme to another, depending on their portfolio composition and market conditions
Pros : Mutual funds are market-linked investments, meaning their returns fluctuate based on market performance.
Cons: One may loose money in short run. Return fluctuate with market.
Returns:
Usually Fixed Deposits provide low returns but known for their safety and fixed returns.
Whereas mutual fund SIP provide good returns in the long run.
Liquidity:
Fixed deposits are highly liquid in nature and therefore one can withdraw money from fixed deposit any time.
Cons: One has to pay a penalty and reduced rate of return in case of premature withdrawal.
Even Mutual Fund SIPs are also very liquid in nature ( except ELSS Funds and Close ended funds). One can stop SIP in between and withdraw money anytime.
Cons: One has to pay exit load if withdrawn before a specified time.
Taxation:
Gains from Fixed deposit are fully taxable. Tax is deducted in the form of TDS.
These Gains are added to income and taxed as per the income tax slab rate of the holder.
While Mutual Fund gains are taxed as LTCG or STCG. Read more Mutual Fund taxation – How your gains are taxed?
But still the gains taxes are lower as compared to fixed deposit.
Additional Reading: How SIPs are taxed?
Is Fixed Deposit a good investment?
Fixed deposit is a boon for risk-averse investors. In fact, Fixed deposit is an age old favorite investment for risk averse investors.
But FD has its own merits such as fixed and safe returns, ease of use and liquidity.
However, for investment purposes Mutual fund outshine Fixed Deposit because of returns only.
Fixed Deposit can be chosen for altogether different purposes such as short term investment ( 3 months-1 year) or for a contingency fund.
Conclusion
Fixed Deposits Vs Mutual Funds, are supreme products in themselves. FD is a one-time investment scheme with safe and fixed returns whereas Mutual Funds are market-linked scheme that provides variable returns.
If investment is concerned then Mutual fund returns are far better as compared to an FD. Even gains from Mutual Funds attract a lower tax regime.
MF offers higher flexibility as one can stop payment in between, withdraw full or partial amounts from SIP investment, and increase SIP investment amount also.
But the major drawback is market linked variable returns. In a downtrend market SIP returns may turn negative in the short run.
If Safety is concerned, then FD is far better than mutual fund investment. FD can be used when one requires safe and secure fixed rate of returns for contingency funding and short-term investment duration.
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