Where Should I Invest Money: Mutual Funds, Fixed Deposits, or Recurring Deposits?
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Fixed deposit is a financial investment instrument offered by banks & NBFCs wherein investors can deposit money and get a higher rate of interest than a normal savings account.
RDs or recurring deposits are an investment tool which allows investors to make regular monthly investments and save money for the long term. Investors can choose the tenure of the deposit and the minimum monthly payment they wish to make according to their convenience. RD schemes are generally more flexible than fixed deposit schemes and are typically preferred by those who want to start an account to save money and build a rainy-day fund.
A Mutual Fund scheme is a type of financial instrument which is made by a pool of money collected from many investors. The AMCs invest in securities like company shares, bonds, stocks, debts, and other assets by mutual fund companies. The AMCs manage these open-ended investments. Mutual fund companies allocate the fund in different securities. This helps its investors to grow their wealth through their investments.
Benefits Of Fixed Deposits
Here are the advantages of having a fixed deposit account:
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Encourages Savings
A fixed deposit account holder will inadvertently save money, since FDs require the holder to invest a lump sum amount for a fixed period of time. Premature withdrawals attract penalties. For example, a FD of Rs. 1,00,000 invested for 3 years at 9% interest rate, if withdrawn after a year, will get interest at the rate applicable at that time, which will be less than 9%. The loss of interest becomes the penalty that you pay for a premature withdrawal.
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Tax Benefits
Tax-saver FD attracts tax benefits under section 80C of the Income Tax Act, 1961. It falls under the Exempt-Tax-Exempt category. Although the interest earned on such FDs is taxable, you can claim a deduction of a maximum of Rs. 1,50,000 for the amount invested.
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Safe Investment
FDs are risk free investments. Unlike other investment tools, FDs are not market-driven. You get an assured sum of money at the end of the maturity period. This is thus an attractive investment for risk-averse investors.
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Higher Rate of Interest
The rate of interest on FDs is higher than that on saving deposits. For example, Axis Bank offers 4% interest on saving bank accounts, whereas the minimum interest that a FD attracts is 5.5%.
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Liquidity
An asset is liquid when you can easily convert it into cash. FDs are liquid. Although the holder will be charged a penalty, FDs can be withdrawn as and when needed. Thus, you always have a certain sum of money to bank on.
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Flexibility
The tenure of FDs varies from 7 days to 10 years. You can invest in FDs for a tenure that matches your business or personal needs. Suppose, you plan to get your child in a particular school in another 5 years, you can opt for a tax saving FD as it has a lock-in period of 5 years.
Benefits Of Recurring Deposits
Following are the benefits of Recurring Deposits that make it an interesting investment option:
- Recurring Deposit is the simplest and most convenient investment option available in the market. If you want to open an RD Account in the same bank that you already have a Savings Account with, you would need minimal documentation.
- However, if you wish to open an RD Account with another bank, you will need to contact the nearest bank branch and submit an application form, along with your basic KYC (Know Your Customer) documents. You may also need to open a Savings or Current Account with them.
- Unlike Fixed Deposit schemes, where one must invest a lump sum amount, Recurring Deposits do not require a huge amount of money at one go. You can opt for monthly payments, using the online banking or fund transfer feature.
- According to an RD scheme, one must deposit a fixed amount of money every month over a period of time. This will instill the habit of regular savings in a person. The amount to be deposited and the tenure of the investment will be decided at the time of opening the Recurring Deposit account. However, you must note that the maximum period of this investment is 10 years.
- Another benefit of recurring deposits is that People of low income can also invest in this scheme as the minimum amount to be invested every month is as low as Rs. 500 (in multiples of rs 100 thereafter). Therefore, it is highly beneficial to people, particularly the set who can partake with little amount from their monthly budget.
- Unlike Mutual Funds and Stocks, in which one can lose money if the market value goes down, the amount invested in RDs is safe and secure, and will be returned along with the interest at the end of the tenure.
- Recurring Deposit is the best and safe option to invest, especially, if you’re planning for short term investments.
Advantages Of Investing In Mutual Funds
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Professional Management
Investors may not have the time or the required knowledge and resources to conduct their research and purchase individual stocks or bonds. A mutual fund is managed by full-time, professional money managers who have the expertise, experience and resources to actively buy, sell, and monitor investments. A fund manager continuously monitors investments and rebalances the portfolio accordingly to meet the scheme’s objectives. Portfolio management by professional fund managers is one of the most important advantages of a mutual fund.
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Risk Diversification
Buying shares in a mutual fund is an easy way to diversify your investments across many securities and asset categories such as equity, debt and gold, which helps in spreading the risk - so you won't have all your eggs in one basket. This proves to be beneficial when an underlying security of a given mutual fund scheme experiences market headwinds. With diversification, the risk associated with one asset class is countered by the others. Even if one investment in the portfolio decreases in value, other investments may not be impacted and may even increase in value. In other words, you don’t lose out on the entire value of your investment if a particular component of your portfolio goes through a turbulent period. Thus, risk diversification is one of the most prominent advantages of investing in mutual funds.
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Affordability & Convenience (Invest Small Amounts)
For many investors, it could be more costly to directly purchase all of the individual securities held by a single mutual fund. By contrast, the minimum initial investments for most mutual funds are more affordable.
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Liquidity
You can easily redeem (liquidate) units of open ended mutual fund schemes to meet your financial needs on any business day (when the stock markets and/or banks are open), so you have easy access to your money. Upon redemption, the redemption amount is credited in your bank account within one day to 3-4 days, depending upon the type of scheme e.g., in respect of Liquid Funds and Overnight Funds, the redemption amount is paid out the next business day.
However, please note that units of close-ended mutual fund schemes can be redeemed only on maturity. Likewise, units of ELSS have a 3-year lock-in period and can be liquidated only thereafter.
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Low Cost
An important advantage of mutual funds is their low cost. Due to huge economies of scale, mutual funds schemes have a low expense ratio. Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund’s daily net assets. Operating expenses of a scheme are administration, management, advertising related expenses, etc. The limits of expense ratio for various types of schemes has been specified under Regulation 52 of SEBI Mutual Fund Regulations, 1996.
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Well-Regulated
Mutual Funds are regulated by the capital markets regulator, Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations, 1996. SEBI has laid down stringent rules and regulations keeping investor protection, transparency with appropriate risk mitigation framework and fair valuation principles.
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Tax Benefits
Investment in ELSS upto ₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are tax efficient.
Conclusion
As mentioned, investing is putting money to work in order to grow it. When you invest in stocks or bonds, you are putting that capital to work under the supervision of a firm and its management team. Although there is some risk, that risk is rewarded with a positive expected return in the form of capital gains and/or dividend & interest flows. Cash, on the other hand, will not grow, and may very well lose buying power over time due to inflation. Put simply, without investment, companies would not be able to raise the capital needed to grow the economy.
Also read- What Is The Appropriate Amount Of Term Insurance Coverage?
