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 continues 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:
What is a Mutual Fund?
A mutual fund is a type of investment fund that allows for the pooling of money from many investors to achieve a greater degree of diversification than would be possible if each investor made an investment individually. The mutual fund can be publicly offered and open to investors or privately placed and open only to a select group of investors, depending on the type of the fund and its home country.
1. Return on Investment
Ultimately, FDs and mutual funds are both investments with their own pros and cons. So, if you’re looking for better returns then FDs might be a good option. If this is the case, make sure you are okay with keeping your money in one place for a predetermined amount of time. This may not be an issue if having liquidity is not necessary to your life goals. If you need greater flexibility and growth potential then mutual funds could be a great solution for you. Remember, there are several types of mutual funds available that vary in risk levels and returns.
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.
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3. Tax Treatment
If we leave aside short-term deposits, there are three kinds of modes of FDs: Monthly recurring deposits, periodical deposits, and fixed deposits. All these three options are not taxable. So if your FD is not being operated for a period of 365 days, you don’t need to pay any tax whatever the amount of interest earned from it.
4. Investing Cost
If you are okay with keeping your money in the bank for a long period of time, FDs can be a good investment option. But if you are extremely bullish on the stock market and have the risk appetite to stay invested in stocks, then mutual funds can help you build wealth over the long term.
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5. Inflation Impact
When investing in the stock market, one of the factors to properly assess is risk versus reward. More specifically, the risk tolerance for investment is essential to evaluate. Inflation and interest rates are also important considerations. If you’re more conservative with your investments, FDs might be better suited to your needs. But if you’re looking for growth potential, mutual funds can provide you with a better option.
Which is the best option for you?
The bottom line is that both types of investments are good. The main purpose of this article is to convince investors that mutual funds can be an excellent alternative to bank FDs and also help them understand the differences between fixed deposits vs mutual funds so that they can make a well-informed investment decision. >>>Read More<<<