Mutual Fund v/s Fixed Deposit; Both are popular investment options. However, every financial vehicle is different and offers investors attractive rewards over time.
When you first start your savings journey, it's normal to feel anxious. As a new investor, you may have many questions about getting started, what to invest, where to put your money, return on investment and tax obligations. Of course, every financial instrument serves different ultimate goals. But, the most popular choice among investors is fixed deposit and mutual fund. So, the next obvious question is whether mutual funds or fixed deposits are better?
If you wish to invest in either of these financial vehicles, you need to analyze the two thoroughly. A comparison between mutual funds and fixed deposits is as follows. But before we do any comparison between the two, let us look at each financial instrument separately.
What is a Fixed Deposit?
As the name suggests, FDs offer investors a fixed rate of interest for a specific period. The tenure of FD can be from seven days to ten years. Interest on bank FD is compounded, which means you earn interest on the interest already earned.
Some leading banks have now revised the interest rates and some have even offered the highest interest rates for longer tenures.
What are mutual funds?
A mutual fund is a financial vehicle that pools money from many investors and invests it in securities like stocks, bonds, money market instruments and other assets. A professional money manager manages mutual funds, allocating assets and generating capital gains or income for the fund's investors. Mutual fund portfolios are created and managed to meet the investment objectives stated in the prospectus.
Key Differences Between Mutual Funds Fixed Deposit?
MUTUAL FUND
Safety
Mutual funds are subject to market risk. Depending on the investor's ultimate goal and risk appetite, different schemes are available with different risk profiles.
Returns
The returns of mutual funds are directly linked to the market they invest in and are completely dependent on the stock market performance.
Expenses
Mutual funds incur certain fees and expenses as part of the management of the fund. That is, the fees paid to the fund managers who manage the investor's portfolio are among the charges or expenses of investing in mutual funds.
Risk
The risk of mutual funds varies from fund to fund and the market primarily determines it. As a result, investors can make large profits if market conditions are favorable, or lose a lot of money if they swing in the opposite direction.
Withdrawal
Premature withdrawal from a mutual fund is permitted as long as the minimum holding time is completed; However, they will charge an exit load of 1% of the fund value if withdrawals are made before the holding period ends.
FIXED DEPOSIT
Safety
On the other hand, Fixed Deposit is a safe vehicle for risk averse investors.
Returns
Fixed deposits provide guaranteed returns at a predetermined rate of return for a given period.
Expenses
On the other hand, individuals who invest in fixed deposits do not bear such costs as there is no middleman involved in the investment process.
Risk
Fixed deposits are generally risk-free investments as investors know exactly how much money they will get overtime. Fixed deposit rates do not fluctuate, and are not affected by market fluctuations or volatility so that investors can expect a constant return on their money.
Withdrawal
Depositors who want to withdraw their money will have to break their FD and pay a penalty for doing so early.
Which is better: Mutual Fund or Fixed Deposit?
While comparing mutual fund v/s fixed deposit, it is clear that both financial instruments have a set of advantages and disadvantages. As a result, it is recommended that anyone interested in investing in one of them take some time to get the information to help them make an informed decision.
There are definite advantages to investing in mutual funds.
Advantages of investing in mutual funds?
Gives more returns
Fund managers with years of expertise will manage your money in the right manner.
SIP (Systematic Investing Plans), SWP (Systematic Withdrawal Plan), STP (Systematic Transfer Plan), and other new investment and withdrawal techniques are available.
It helps in diversification.
SIP allows for minimum investment, thereby reducing risk.
An important advantage of investing in mutual funds is that when comparing mutual funds and fixed deposits, FD interest rates are now barely able to keep up with inflation.
Disclaimer: All Mutual Funds are subject to market risk. Please read all scheme-related documents carefully.
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