Investments have become an integral part of our lives as we all need to secure our future in every possible way. When thinking of saving money, the first thought that most people consider doing is Investing and the ways to do it. Saving comes in many forms, viz. FD, RD, Mutual funds, and so on. All the investment tools have their pros and cons. In this article, we will primarily talk about the two most common methods of investing, that are – Mutual fund and Fixed deposits. We will delve deeper into the pros and cons of both and enlist

What is a Fixed Deposit?

A fixed deposit is a way of saving money by investing it for a certain tenure in banks and other NBFCs (Non-Banking Financial Companies). The process of opening a fixed deposit is very simple – the depositor has to choose a certain tenure (which usually ranges from as short as 7 days to 10 years) and lock in their hard-earned money for that duration. Banks provide the respective interest rates on the tenure chosen. The longer is the tenure, the more is the interest earned.

Usually, it has been observed that senior citizens invest in fixed deposits (FDs). That’s usually because it is easy to understand and is being done for generations. One more reason being the higher interest rate. Most of the banks provide around 0.50%-0.65% higher interest rates to senior citizens over the regular rates that are provided to general citizens.

But the question now arises -is it the most appropriate investment? And does it provide the required returns with increasing inflation? Well, we will look into it one we are done explaining about mutual funds.

What are Mutual Funds?

What if you come to know that you can invest your money and have someone else professionally manage it for you? Investments like these do exist, but they come with a little bit of complexity and require a little bit of research, unlike FDs. Furthermore, in some cases, it also demands high amounts of capital or money be invested.

A mutual fund is a type of financial vehicle which is formed by pooling money collected from different investors with the same investment objective. These funds are then invested in securities like stocks, bonds, money market instruments, and other assets.

Mutual Fund vs FD

Coming to the management of these funds, these funds are managed by money managers or commonly referred to as fund managers, who by investing in line with the specified investment objective focus to create growth or appreciation of the amount for investors.

Mutual vs FD – Which is Better?

Whether you go for fixed deposits or mutual fund investments can serve the purpose better? To know the answers to these questions, there must be some points that give the details of both. Let’s see what are the major differences between them and which is the best fit for you?

Parameters Mutual Fund Fixed Deposits
Returns Mutual Fund returns are market dependent as they are directly linked to the market they invest in and are completely dependent on the performance of the companies in the stock market. Fixed deposits are safer and as the name goes, it offers fixed and guaranteed returns at a predefined rate of return over a specific time period.
Risk The risk involved in a mutual fund is not certain and varies from fund to fund, it is mostly influenced by the market. However, when compared to FDs, they are a bit riskier FDs carry zero risks as the depositor receives guaranteed returns as promised by the financial institution at a fixed interest rate.
Expenses Mutual Funds usually carry certain expenses and charges that are deducted as a part of managing the fund, as they are operated by the fund managers. FDs do not come with any kind of expenses or charges over the course of initiation or tenure of the deposit.
Withdrawal You can redeem from a mutual fund free of charge after a given point of time. The charges levied are in the case of exit load. For withdrawing before the stipulated time, the charges levied will be that of 1% in the form of exit load. Depositors who want to withdraw the funds before the tenure will have to break their FD and pay the penalty for the same during premature withdrawal.
Taxation All mutual funds are subject to short term and long term capital gains tax. STCG is charged at a flat rate of 15% whereas LTCG is charged at a rate of 10% of the earnings above ₹1 lakh. In the case of debt funds, LTCG is 20% post indexation. FDs are also subjected to 10% TDS on interest if the interest earned exceeds ₹10,000 over a financial year.

On a Closing Note

Both Mutual funds and fixed deposits are forms of investment with completely different prerequisites and suit different categories of people. You can decide on your own which one to go for after contemplating the points illustrated above. However, it is imperative that you should do thorough research before investing your hard-earned money anywhere.

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