Mutual Funds vs Fixed Deposits: Which one to choose?

Mutual Funds vs Fixed Deposits: Which one to choose?
July 07 15:30 2017 Print This Article

We all are enlightened to the noteworthiness of saving money. It is a common perception to save potentially because the future is unpredictable. Saving money would strengthen your financial security and acts as a safety net during urgent times. Potential savings is the difference between the net income and expenses. And, often saved money is invested to earn a return on them.

But the question is, where to invest?

Investment is preferable where the return is high.

And then the next question arises: Where the return is high, Mutual Funds or Fixed Deposits?

To answer this question, it is paramount to introspect the aye and nay of both types of investment.

  • A crucial factor to be considered before choosing between FDs and MFs should be the tax status. Fixed deposits may give captivating returns on paper, but with the current tax structure, the more one invests in FD’s, the more tax one has to pay.

So, the prospects of loss are more, taking the rate of inflation into consideration.

  • Instead the tax status of MFs totally depends on its category. Equity based funds held for long terms (more than a year) are not taxable. Short term equity based funds are taxable at the rate of 15%. Long term debt fund gains are taxable at 20% (with indexation) and 10% (without indexation) and short-term capital gains are taxable according to investor’s slab of tax.

 Hence MFs are tax friendly compared to FDs. Long term equity funds are not taxable at all.

  • In terms of risk, FDs are generally having minimum risk, whereas equity mutual funds carry high market risk with them, and debt mutual funds carry lower market risk than equity.

 But risks can be attenuated to an extent as MFs are administered by qualified professionals. Mutual funds are vulnerable to market risk. But it is well known principle that, higher risk gives higher returns.

  • Considering rate of returns, rates of fixed deposits are fixed before and are not altered for the entire tenure. On the other hand, mutual funds rates are impacted by market conditions.

 So, during favourable market conditions, there are capable of earning better returns whereas fixed deposits rates are unaffected.

  • Mutual funds have high liquidity. It also depends on various conditions such as schemes for – whether open-ended or close-ended, lock-in period, exit load, performance of the scheme, etc. However, the liquidity of bank FD Is bound by the tenure of the FD.

The option to withdraw a bank FD before the stipulated period is of available, but a portion of your expected return is lost and a penalty is charged. Thus, bank FDs offer medium-to-low liquidity.

Conclusion- Notwithstanding the above, investing in mutual funds is propitious, because:

  • Offers economies of scale
  • Prudently allocating investible surplus; and
  • Hard-earned money managed by qualified professionals;
  • Facilitates heterogeneity;
  • Low minimal investment amount and higher returns;
  • Offers innovative modes of investing and withdrawing;

Hence, mutual funds are likely to be more profitable. You can invest from here, if you ready to take a step forward to mutual fund investments.

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Jacques Jeanlouis
Jacques Jeanlouis

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