Should I Buy Mutual Funds or Fixed Deposits?

Generally, investments are made to maximise returns while minimising risk. However, specific goals for investment can include things like consistent monthly returns or long-term wealth growth, among other things. There are many investment possibilities in the market, and as an investor, you will have to decide which product to choose. So, if you have to choose between mutual funds and fixed deposits, continue reading to get a clearer picture of both the plans and choose accordingly. 

What is a Mutual Fund?

A mutual fund is a shared pool of funds into which individual participants contribute their separate amounts. This pooled money is subsequently invested in accordance with a defined goal, which is also the fund goal. These funds are professionally managed. Debt, equity, and balanced mutual funds are the three categories of mutual funds. Debt funds engage primarily in fixed-income securities such as government and corporate bonds, whereas equity funds invest primarily in market-related instruments, and balanced funds blend the two.

What is a Fixed Deposit?

A fixed deposit (FD) is an investment option in which an investor deposits a lump sum amount with a bank or a non-bank financial institution (NBFC) at a fixed rate of interest for a set period of time. Interest rates on FDs might vary depending on the term and lender restrictions. Fixed deposits are also known as term deposits, and you can invest in them for a period of time ranging from a few days to many years. Fixed deposits are divided into two categories: cumulative and non-cumulative. Interest on interest accumulates in cumulative deposits, and you earn interest on interest. Interest is given to the investor on non-cumulative deposits at predetermined periods, such as monthly, quarterly, or annually.

Must read: Planning To Invest In Mutual Funds? Here's What You Need To Know About Mutual Funds    

Mutual Funds VS Fixed Deposits

Here is a detailed comparison between mutual funds and fixed deposits. 

• Returns - Mutual fund returns are directly tied to the market in which they invest and are fully reliant on stock market success. Fixed deposits provide guaranteed returns at a predetermined rate of return for a set length of time.
• Additional Fees - Mutual funds have specific fees and expenses that are deducted as part of the fund's management. There are no fees associated with FDs during the beginning of the term of the deposit.
• Risks - A mutual fund's risk varies from fund to fund, and it is largely influenced by the market. FDs are risk-free since the depositor receives guaranteed returns at a fixed rate.
• Withdrawal - After a certain period of time, you are free to withdraw from a mutual fund. If you withdraw before the deadline, you will be charged a one per cent exit load. On the other hand, depositors who want to withdraw their money will have to break their FD and pay the penalty for doing so early.
• Taxation - Short-term and long-term capital gains taxes apply to all mutual funds. STCG is calculated at a fixed rate of 15%, whereas LTCG is calculated at 10% of earnings beyond $1 lakh. In the case of debt funds, the LTCG is 20% after indexation. In contrast, on interest earned over $10,000 in a financial year, FDs are subject to a 10% TDS.

Should I Buy Mutual Funds or Fixed Deposits?

Mutual funds are vulnerable to market risks, whereas FDs provide guaranteed returns. Mutual funds, on the other hand, can be good investment options in a dropping interest rate environment if you understand your risk level and invest accordingly. Mutual funds have a large tax advantage over FDs due to indexation benefits in long-term capital gains taxation. To make informed investment selections, you should analyse your financial goals and risk appetite and invest accordingly. 

Also read: Definition And Features Of Fixed Deposits

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.