Fixed Deposits or Mutual Funds: Which is Better for Investment Profile?

Fixed Deposit
Make yourself financially secure by investing in a mutual fund or fixed deposit. Photo Credit: Pexels

Financial security is of great importance in every individual’s life. People are always on the lookout for any type of opportunity that provides them with financial gain. A prominent way people opt for is investing in plans like fixed deposits and mutual funds.

In fact, fixed deposits vs mutual funds is a common topic of debate everywhere. Be it first-time investors or regular investors, the question “ Fixed Deposits or Mutual Funds? Which is better?”, is always asked.

Fixed Deposit

A Fixed Deposit (FD) is an investment in which a person invests a fixed amount of money for a particular time period along with the aim of making money via interest. For instance, you invested ₹ 100 for a time period of 5 years at a 5% rate per annum. Hence, you will gain ₹ 5 as the interest amount every year. You can use FD calculator to calculate returns on fixed deposits.

Benefits Of Fixed Deposits

  • Very stable and safe investments
  • Options to withdraw interest generated money after maturity
  • No risk of loss
  • Market and economy crashes will not put your FD at risk.

Drawbacks Of Fixed Deposits

  • Although they have higher returns than regular savings, the interest returns are low because of the low-risk factor
  • It’s not possible to withdraw your deposit at short notices and a penalty is charged for the same as well.
  • The interest on the deposit gets added to your income and gets taxed, hence offering no tax benefits in general.

Mutual Funds

Mutual Funds are a form of investment in which the investor’s money is combined with other investors’ money in a common pool which in turn as a whole is invested in the equity market by trading stocks and shares of various companies. There are various types of mutual funds depending on the investors’ financial aspirations. Investors gain financially in the form of dividends and capital gain.

Benefits Of Mutual Funds

  • One can opt-out of the mutual fund plans as per their desire by selling their mutual fund units.
  • All the investments made via mutual funds are done by a mutual fund expert, hence investors don’t have to do much market research and think about in which particular stock to invest.
  • Mutual Fund plans have options for all sorts of financial goals ranging from stable returns for constant gains or large financial gains as well.
  • Mutual Funds allow investments in diverse areas to manage risk. This is called diversification of investment.

Drawbacks Of Mutual Funds

  • Investing in a mutual fund comes with expenses like salaries of fund managers and analysts.
  • Although diversification minimizes risks, it also reduces the possibilities of larger returns.

How to invest in Mutual Funds easily?

These days with the growth of digitalization, investing in mutual funds is no longer a hard task. You can follow the following steps and invest in mutual funds easily:

  • First of all, you should know that you can take the help of any online investment service which is available at the click of a button. You can do research and select the best platform for yourself.
  • Once you have selected the investment service app provider, scroll through their list of funds.
  • Again, check through a variety of resources about which funds are the best to invest in.
  • Once selected, invest in the mutual funds of your choice.

Now that we have discussed the basic benefits and drawbacks of fixed deposits and mutual funds, let’s take a look at how these differ with regard to investment criteria.

Quality and Rate of Returns on Investment

Since both your initial investment and interest rate are fixed, the rate of interest or the rate of return you get on a fixed deposit will be the same throughout. You can calculate it with the help of an FD Calculator. On the other hand, mutual funds prove to be ideal for long run investments as they are linked to various markets. Hence, they provide quality returns in the long run. Mutual funds’ rate of returns depends on market fluctuations and they type of fund an investor opts for.

Risk Involved

Fixed deposits are the safest investment an individual can make, with zero risks involved and no loss on the initial investment made. Investors can use a FD calculator to keep track of their investments in various market situations. Mutual Funds are directly related to the market, hence any fluctuations will impact your investment, hence making it a riskier option. However, if invested properly, mutual funds can prove to be much beneficial than fixed deposits.

Liquidity

Fixed deposits are locked by a bank and individuals cannot withdraw their investments before the decided time period. If they do so, they will incur a penalty fee. Investors can use an FD calculator to check their returns at the time of withdrawal. Hence, they have low liquidity. Mutual funds have high liquidity since investors can sell their units whenever they want to with minimal depreciation in the value of the fund.

Tax Benefits

Fixed deposits do not offer any tax benefits since they are taxed after being added to the investors’ income. Mutual fund returns are taxed differently, based on the short-run returns and long-run returns. This enables investors to earn maximum returns from their investments. 

Deciding whether fixed deposits or mutual funds are the better options for your investment portfolio is not an easy task. Based on the discussions above, investors who are looking for a stable investment plan with no risks can opt for fixed deposits or a type of mutual fund like large-cap, which will allow them to do the same but with a little more risk involved. They can use an FD calculator to check which one suits them the best. On the other hand, investors who are looking for quality returns and investments in the long run, and are comfortable in taking risks, mutual funds are the way to go.

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