Mutual Fund vs Fixed Deposits - A Useful Comparison

Mutual Fund vs Fixed Deposits – A Useful Comparison

Fixed deposits have been the preferred choice of investment for not just investors but also for individuals who want to put their funds in a safe place and get fixed returns. Having a pre-set rate of interest, fixed deposits are offered by several financial institutions. However, over the years mutual funds have gained popularity over fixed deposits owing to better returns. This has resulted in people thinking ‘Should I invest my money in secure bank deposits or mutual funds?’ We compare the key features of both products to help you make an informed decision.

Earnings on Investment:

Widely known as return on investment (ROI), profit is a crucial factor. Banks have a fixed ROI for certain income slabs and age groups. Interest can be calculated monthly or quarterly. In case of mutual funds, ROI is not fixed. It is largely controlled by market conditions.

Impact on Taxation:

After returns, this is another vital aspect that investors ask their financial advisors. Income gained from mutual funds and fixed deposits is taxed differently. Interest accrued from fixed deposits is charged in accordance with tax slabs of the individual and it is included while filing returns. Mutual funds generate dividend which are assessed as capital gains. If mutual fund units are redeemed in less than 3 years, they attract lower tax rates. If you don’t sell them for 3 years, tax charged is almost nil making your investment highly profitable.

Ease of Withdrawal/Liquidity:

If you have a fixed deposit of Rs. 2.5 lakh and need Rs. 30,000, you have no option but break your entire investment. Besides, there is a penalty charged in some cases and rate of interest falls too. Mutual funds offer the advantage of complete liquidity. Investors can take out any amount they want and it’ll be removed from the total value. Returns will be generated from the remaining amount.

Growth of Capital:

When it comes to capital appreciation, mutual funds score over traditional fixed deposits. There is a small amount of equity involved in these funds which leads to rise in capital. Moreover, escalation of interest rates and the brilliant professionalism displayed by fund managers these days, mutual funds offer superior capital appreciation as compared to fixed deposits.

Volatility Factor:

This is a no-brainer. In case of fixed deposits, the rate of return is predetermined hence the returns are also fixed making it a safe low-risk financial product. Mutual funds’ performance is based on market trends. Any kind of instability in the market can affect the mutual fund value and result in poor returns.

Fixed deposits have a pre-set rate of interest making it an ideal product for investors who want to play safe and believe in capital preservation. Mutual funds on the other hand attract lower taxation and offer easy liquidity. Ultimately, it depends on the investors financial goals. They have to closely determine whether it is mutual funds or fixed deposits which will best fulfil their future monetary needs.