Which Is Better - Mutual Funds Or Fixed Deposits?
June 05, 2019
Bank Fixed Deposits (FDs) have long been a go-to savings option in India. But with the increasing financial awareness, people are now experimenting with newer options such as mutual funds. But are mutual funds better than FDs? Read this post to find out.
When it comes to investing, Indians prefer doing it the old-school way. As a result, FDs continue to be one of the most popular investment options. But with the increasing number of investment options in India that have the potential to offer better returns and more benefits, a significant shift in the mindset of the masses is being witnessed.
Mutual funds are getting increasingly popular among investors as it meets most of the common investment requirements. But are mutual funds better than FDs? Let us have a look at some important FD versus mutual fund differences to help you make the right decision:
1. Return on Investment
FDs offer fixed returns. Banks have a fixed interest rate based on your investment tenure, which you will receive at the end of the tenure. In most cases, it ranges between 7%-8% per annum. For many people, this fixed return is one of the biggest benefits.
Mutual funds, on the other hand, are generally more promising. While the returns are not guaranteed, most types of mutual funds can offer higher returns than FDs. However, unlike FDs, your investment in mutual funds carry a certain level of risk.
2. Lock-in Period
FDs have a fixed lock-in period of generally a year. Pre-mature withdrawal will require you to pay the penalty.
With mutual funds, there is no lock-in period with most funds and you can withdraw your investment any time you like. But if you are investing in tax-saving Equity Linked Savings Schemes (ELSS) funds, there will be a lock-in period of 3 years.
3. Tax Treatment
The interest that you earn from FD is taxed as per your income tax bracket, irrespective of the tenure of your deposit.
With mutual funds, long-term and short-term capital gains are applicable based on the type of fund (equity or debt) and holding period. If you are investing in ELSS, the investment is tax-exempt up to Rs 1.5 lakh in a year under Section 80C.
4. Investing Cost
With bank FDs, there is no investment cost, and you will receive the entire interest promised by the bank at the end of the tenure.
Mutual funds have expense ratio or an annual fee which varies between different types of funds and can be in the range of 0.5% to 2% and even more.
5. Inflation Impact
Mutual funds are known to be more beneficial. With FDs, the returns are pre-decided. But when you invest in a mutual fund, the returns are inflation-adjusted. This increases their potential to generate higher returns.
What Should You Select?
There is no single answer when you are looking to select between FDs and mutual funds. There are several differences between FD and mutual funds, and both have their benefits.
Investors who are risk-averse and want fixed returns from their investment can consider bank FDs. However, if you have long-term investment goals and are looking for an investment option that can deliver higher returns, mutual funds can be an excellent option.
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