Two of the most often used investing choices in India are fixed deposits (FDs) and mutual funds. Both fit varied degrees of risk tolerance and have distinct financial objectives. Examining these financial products helps in understanding their key characteristics and differences.
Contents
- What Are Fixed Deposits
- What Are Mutual Funds
- Comparison: Mutual Funds Vs Fixed Deposits
- Which Option is Right for You
- Conclusion
- FAQs
What Are Fixed Deposits
Fixed Deposits (FDs) are a common funding choice provided by banks and financial companies. You make a one-time payment for a period, and the bank or organization gives you a fixed interest rate.
Essential Aspects of Fixed Deposits:
- Stable Returns: The interest rate is set when you make the deposit and stays the same for the entire time you choose to keep it there.
- Low Risk: FDs are considered safe investments as they are not subject to market changes.
- Tenure Flexibility: You can select a few months to several years.
- Early Withdrawal: Although fixed deposits (FDs) are usually not accessible before the end, you can take your money out early, but you will have to pay a charge.
Taxation on FDs:
- The interest you earn on fixed deposits is taxed based on your income tax bracket.
- Tax-saving FDs with a 5-year lock-in time offer benefits under Section 80C of the Income Tax Act.
Also Read: Understanding the Role of Mutual Funds in Retirement Planning
What Are Mutual Funds
Mutual funds gather money from many people to invest in assets like stocks, bonds, or a combination of both. A fund manager takes care of the investment portfolio based on the scheme’s goals.
Essential Points About Mutual Funds:
- Diversification: Mutual funds invest in various assets, which lowers the risk of relying on just one investment.
- Variety: Investors can pick from different types of funds, like stock funds, debt funds, or mixed funds, depending on their goals and how much risk they are comfortable with.
- Liquidity: Most mutual funds let you cash out whenever you want, except for specific plans.
- Professional Management: Fund managers work to improve financial results.
Taxation on Mutual Funds:
- If you sell stock funds that you have owned for more than a year and make a profit over ₹1 lakh, you will be taxed 10% on the profit amount that exceeds ₹1 lakh.
- Debt funds owned for over three years are taxed at 20% with indexation benefits.
Comparison: Mutual Funds Vs Fixed Deposits
When comparing mutual funds and fixed accounts, key differences lie in risk levels, yields, liquidity, and tax efficiency. Knowing these differences is essential to making the best choice.
| Feature | Fixed Deposits | Mutual Funds |
| Risk | Low | Varies (low to high based on type) |
| Returns | Fixed | Subject to market movements |
| Liquidity | Penalty on premature withdrawal | Depends on fund type and lock-in period |
| Tax Efficiency | Taxable as per slab rate | LTCG/STCG tax benefits |
| Tenure | Predefined | Flexible |
Also Read: Understanding Asset Allocation in Mutual Funds
Which Option Is Suitable?
Deciding between mutual funds and fixed savings depends on a few things:
Risk Appetite:
FDs may be ideal if you prefer a safe investment with predictable results. If you are okay with market-based gains and can handle some risk, mutual funds could help you grow your money more.
Investment Goals:
Fixed deposits have a set time period and fixed interest rates. Mutual funds depend on the market and can change based on how money is invested and the amount of risk involved.
Tax Efficiency:
Fixed deposits (FDs) are not great for taxes because the interest you earn from them is fully taxed. Mutual funds, particularly those focused on stocks, have better tax benefits for long-term investments.
Liquidity Needs:
If you need money quickly, mutual funds are a better choice than fixed deposits (FDs) because FDs may charge a fee if you take your money out early.
Conclusion
Mutual funds and fixed accounts serve different financial goals. Fixed savings are suitable for investors who want safe and steady growth. On the other hand, mutual funds can provide higher returns by spreading out investments and having professionals handle them. Knowing the features of financial products helps people choose the one that fits their needs.
Disclaimer: Investments in securities market are subject to market risks; read all the related documents carefully before investing.
FAQs
Yes, individuals can allocate funds across different financial instruments to help balance risk and returns in their portfolios.
You can start buying in mutual funds with just ₹500 using a Systematic Investment Plan (SIP).
Mutual funds are investments connected to the market and overseen by SEBI. Fixed savings may come with promises based on the rules of the granting organization.
References:
https://groww.in/blog/fixed-deposit-vs-mutual-funds-comparative-analysis
https://www.icicibank.com/blogs/fixed-deposits/mutual-fund-or-fixed-deposits
