Deposits
Fixed Deposit (FD) vs Mutual Funds (MF)
For investors aiming to grow their wealth, Fixed Deposits and Mutual Funds are two popular investment options. Both investment options offer several different benefits and therefore it is important to understand the key differences between FD and Mutual Funds before investing in any of the asset classes.
An overview of FD vs Mutual Funds can help investors understand where they should invest based on their financial goals and risk appetite.
Difference between FD vs Mutual Funds
Knowing the differences between FD and Mutual Funds will help investors understand whether they should invest in an FD or Mutual Fund. Here are the key differences between FD and Mutual Funds:
| Feature | Fixed Deposit (FD) | Mutual Fund |
|---|---|---|
Nature of investment | Low-risk, fixed returns | Market-linked, varying returns |
Risk level | Low | Moderate to High |
Returns | Fixed and based on predetermined interest | Variable and market-dependent |
Liquidity | Generally less liquid, with penalties for early withdrawal | Generally more liquid |
Lock-in period | Fixed term with maturity date | Varies depending on the type of Mutual Fund (some have no lock-in) |
Diversification | Limited to a single investment | Offers diversification across various securities |
Control over investment | Limited, fixed interest rate decided at the beginning | Fund manager makes investment decisions |
Tax implications | Interest earned is taxable | Capital gains tax on redemption; dividends may be taxed |
Suitability | Suitable for conservative investors looking for stable returns | Suitable for investors seeking potential higher returns with a higher risk appetite |
Inflation Hedge | Returns may not always beat inflation | Potential for higher returns that may outpace inflation |
What is a Fixed Deposit?
A Fixed Deposit is an investment option that lets investors put their money in a safe asset class that provides guaranteed returns based on pre-determined interest rates. An investor can invest in FDs for a few days to several years. The lock-in period of an FD can be decided by the investor based on their financial goals.
Last but not least, most banks offer a higher interest rate on Fixed Deposit accounts opened by senior citizens. It is, therefore, a popular investment option, especially among conservative investors looking for stable and predictable returns.
What is a Mutual Fund?
A mutual fund is an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Investments in a Mutual Fund are basically managed by professional fund managers who make decisions to invest in various available asset classes to optimise returns.
Mutual Funds offer various types, catering to different investment goals and risk appetites. Some common types include equity funds, bond funds, money market funds and hybrid funds. The returns of Mutual Funds are totally dependent on the underlying asset class.
Benefits of FD vs Mutual Fund
FD and Mutual Funds have various benefits that one needs to understand before investing in any of the assets.
Benefits of FDs
- Fixed deposits provide returns on investments at a predetermined interest rate.
- Investors can choose FD tenures based on their financial goals.
- FDs provide fixed returns without the need for a financial expert to manage a diversified portfolio.
- FD returns are not influenced by market fluctuations.
- FD provides stability for shorter investment tenures.
Benefits of Mutual Funds
- Mutual Funds are managed by financial experts who make investment decisions on behalf of investors.
- Investors get exposure to a variety of assets with Mutual Funds.
- Mutual Fund diversification reduces risk compared to investing in individual stocks or bonds.
- Allows investors to enter financial markets with relatively small amounts of money.
- Mutual Funds are typically more liquid than FDs.
- Professional management eliminates the need for investors to actively monitor and manage their investments.
How to invest in a Mutual Fund vs FD?
Investing in Mutual Funds and Fixed Deposits (FDs) involves different approaches as both asset classes are poles apart from each other in almost every sense.
Investing in a Mutual Fund
- Investors are required to open a Mutual Fund account either online or offline with asset management companies directly or through mutual fund distributors.
- Upon creating the account, investors can search, shortlist and select a Mutual Fund based on financial goals and risk appetite.
- Once a particular Mutual Fund is selected, Investors can either invest a lump sum amount or set up a Systematic Investment Plan (SIP) for periodic investments.
Investing in a FD
- Compare the FD rates offered by various banks or financial institutions.
- Visit the online banking website of a bank or pay a visit to a nearby bank to open a Fixed Deposit account.
- Upon the registration is completed, select the tenure and the investment amount to get started.
- Last but not least, decide the frequency (monthly/quarterly) at which banks pay the interest on the investment.
Safety of FD versus Mutual Funds
Fixed Deposits (FDs) are generally considered safer than Mutual Funds due to their fixed interest rates and guaranteed returns. FDs are also protected by deposit insurance schemes that safeguard a portion of the invested amount.
On the other hand, Mutual Funds carry market risk as their returns depend on the performance of the underlying securities. While Mutual Funds offer diversification, they are subject to market fluctuations and therefore are considered less secure than FDs. But there are a few types of Mutual Funds like debt mutual funds that invest in fixed income instruments.
Also Read: 6 advantages of an Auto Fixed Deposit
Conclusion
FDs assure fixed returns and the investment is considered low-risk. However, FDs lack the potential for higher returns seen in Mutual Funds which are also suited by those looking to gain market exposure along with professional management of investments.
Ultimately, the choice between investing in a Fixed Deposit or Mutual Funds depends on individual preferences, risk tolerance, and financial goals.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
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