Whenever the topic of mutual funds vs. fixed deposits arises, fixed deposits end up walking away with the favourable vote of confidence. For the longest time, fixed deposits were the only kind of investments that were regarded as safe and dependable. In this article, we aim to explore this topic further.
If you are someone who grew up in India, we can easily assume that you are no stranger to the concept of fixed deposits.
Any financial advice pouring in from senior family members probably included fixed deposits as a mandatory investment.
Between mutual funds and fixed deposits, which is a better investment? This seems to be the most common question asked by investors today.
Whenever the topic of mutual funds vs. fixed deposits arise, fixed deposits end up walking away with the favourable vote of confidence.
For the longest time, fixed deposits were the only kind of investments that were regarded as safe and dependable.
As the financial markets became more sophisticated with time, the investment choices continued to grow exponentially. Today there are countless financial products that cater to various financial needs of the different types of investors. One such investment option is mutual funds.
In this article, we aim to provide more information about mutual funds vs. fixed deposits and help you understand how these two kinds of investments compare in terms of return, scope for growth, stability, taxation and other aspects.
We hope the information included here will help you decide whether fixed deposits or mutual funds is a better investment option for you and your financial needs.
A mutual fund is a popular financial product, that pools money from multiple investors and invests that money in the equities market. A mutual fund uses the said financial resources to purchase stocks and shares of multiple companies trading on the stock market.
Now that we have understood the mutual fund definition, let’s learn more about how mutual funds work.
When you invest in a mutual fund, you purchase the mutual fund units (also known as unit shares) to the extent of your investment. There are two possible ways in which you can invest in mutual funds; you can either invest a lump sum amount and see how your investment fares over time or invest in the form of a systematic investment plan (SIP).
SIP refers to investing a predetermined amount on a periodic basis. Each SIP enables you to purchase additional units of the mutual fund. The value of your units held in a mutual fund is determined by the fund’s Net Asset Value (NAV)
An integral part of understanding how mutual funds work is to learn how you earn from mutual fund investments.
If you opt for dividend payments, a mutual fund will payout its annual earnings as dividend payments. If you opt for reinvestment of your annual earnings back into the mutual fund, you will have the benefit of capital gain. Capital gain refers to the increase in the value of your asset, it essentially means that your asset is worth more than what you paid for it.
Know more about how to invest in mutual funds in India.
A fixed deposit is a financial instrument offered by banks, post office, and other NBFCs (Non-Banking Financial Company) which offers the investors a higher rate of interest compared to regular savings or a salary account. The money invested in fixed deposits is used by the banks as capital for other business operations. One such example is issuing loans at a higher interest rate than the rate they pay to fixed deposit account holders.
Now that we have learnt the fixed deposit definition. Let us learn more about how a fixed deposit works.
A fixed deposit is a type of an account opened with a bank, where a bank agrees to pay a fixed rate of interest for a particular period of time.
For example, let us assume that you invested a sum of Rs. 10,00,000 for 5 years, with a bank that offers an interest rate of 6% per annum. You would be receiving Rs. 60,000 as interest payment each year for a 5-year period. Based on your financial needs, you can choose to have this interest amount deposited into your account on a monthly basis or once every quarter or once a year.
For some reason, mutual funds and fixed deposits are constantly pitted against each other. When people constantly ask which is better, mutual funds or fixed deposits, it isn’t necessarily a fair comparison because these two financial products differ in one major aspect.
One of the biggest differences between mutual funds and fixed deposits is that, a mutual fund provides return on the money invested and fixed deposits offers interest payments on the money deposited. As you can see, there is a major difference between investing money (investing being the keyword here) and depositing a lumpsum in one go (depositing being the keyword here).
To help you understand this better, in this section, we have included more information about the difference between mutual funds and fixed deposits.
In order to deposit a lump sum, you need to have that kind of money already available. Typical investors in fixed deposits are the ones who would have already accumulated surplus cash over a period of time. For this reason, fixed deposits are a popular choice of investments for retired individuals and senior citizens. Another category of fixed deposit investors are the ones who would have huge sum coming in from a sale of property or inheritance.
Investing in mutual funds, on the other hand, doesn’t necessarily require any surplus cash and it doesn’t have to be a lump sum investment (unless that is what you want to do). You can invest a small percentage of your monthly income in the form of SIP investments. When your income increases over a period of time, you can also increase the percentage of your income that would be set aside for SIP. For this reason, mutual funds are an ideal form of investment option for salaried professionals and individuals with some form of monthly income.
In addition to what is discussed above, many investors always wonder which has a better presence in India, mutual funds or fixed deposits?
Traditionally, as we have mentioned earlier, fixed deposits have always been popular because the investors consider fixed deposits safe and risk-free. But as mutual funds started gaining popularity, and investors started seeing better returns, mutual funds are beginning to give tough competition to fixed deposits.
But, if you are evaluating your options and deciding between an investment in mutual funds versus fixed deposits specifically for you, the answer completely depends on your income, your monthly expenses, and your financial goals. Before you decide where and how you would like to go about investing, you need to have a clear idea about these aspects.
You would like to read more about financial goals.
Now, let us learn more about how mutual funds and fixed deposits differ on certain key investment parameters.
All said and done, if you are looking to invest money for long-term wealth creation, mutual funds are a better option.
If you have always wondered what is the difference between mutual funds and fixed deposits, we hope this article helped you understand this topic better. If you have any further questions, feel free to explore our blog.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.