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Fixed Deposits v/s Mutual Funds

Written by - Akshatha Sajumon

March 2, 2019 5 minutes

“The biggest risk is not taking any risk… In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks. “

–Mark Zuckerberg

Though risk and return are two sides of the same coin, the risk is still the most feared factor amongst Indian investors today, especially the amateur investors. The fact that Mutual Funds are subjected to market conditions, makes investors so skeptical regarding investments with Mutual Funds. Fearing market volatility and safety of funds, investors find it safer to invest in Fixed Deposits rather than in Mutual Funds. But to overcome this conventional practice, it’s important for us investors to understand why and how Mutual Fund investments are a better option than Fixed Deposit and this article will help with that.

Here’s a table that lists the key differences between Mutual Funds and Fixed Deposits.


Fixed Deposits

Mutual Funds

1. MeaningFixed Deposits are offered by both banking and non-banking financial institutions, where you deposit money for a fixed period and for a predetermined rate of return. Mutual Fund is an investment vehicle that collects money from multiple investors and invests the money, on their behalf, to buy securities.
2. Fund Management Decisions regarding Fixed Deposits have to be made by the investor himself.Mutual Funds are managed by professional funds managers who actively work on the portfolio to earn higher returns on the investment.
3. Schemes
  • Cumulative – Interest is compounded quarterly.
  • Non- Cumulative – Interest is paid at fixed frequencies.
  • Regular Plans: Charges distribution or transaction fee from your investments to pay commission to brokers.
  • Direct Plans: Fisdom Direct Plans charge No Fees and No Commission on your investments. Read More: Why Direct Plans?
4. Minimum InvestmentThe minimum investment for Fixed Deposits is INR 1000. (Varies from bank to bank).One can invest in Mutual Funds with as low as INR 500.
5. Maximum Investment Fixed Deposits have no upper limit.Mutual Funds have no maximum limit to the amount you can invest.
6. Investment TenureFixed deposits come with a pre-stated maturity period. It varies between 7 days to 10 years.The minimum tenure for Mutual funds is a day. And you can remain invested for more than 20 years too. It purely depends on your investment horizon.
7. Returns Fixed Deposits comes with a fixed interest rate that ranges between 7-8%, so one cannot make more than the projected returns.Since Mutual funds are subjected to market conditions, you can earn returns between 9-15% or even more. Thus, the potential to earn returns are higher and never fixed. Read More: Funds that provide >15% returns.
8.WithdrawalsPremature withdrawals are permissible but are subject to fines. You can either break your Fixed Deposit or take a loan against it, to access your money.Mutual Funds are highly liquid instruments. With Fisdom , you can access your funds anywhere and anytime. You have the freedom to access your funds for any financial requirement. Read More: How do I utilize my funds?
9. DepositsFixed Deposit allow only one-time lump sum deposit. For more deposits, one has to open another account, leading to the hustle of handling many accounts. With Mutual Funds, you can invest through lump sums or monthly installments called SIPs (Systematic Investment Plan), and increment these contributions as and when your income increases. Read More: Benefits of SIP
10. RiskFixed deposits have zero risks this is because the money is locked in the bank. Mutual funds let you invest in various assets or financial instruments (debt, equities, etc) thereby, diversifying the risk. Besides, fund managers rebalance the portfolio on a regular basis and help in reducing the risk. Read More on Fund Categorization
11. FlexibilityThe sole purpose of a Fixed Deposit is to keep your money safe in the bank and earn fixed returns, more than that of savings account. With Mutual Funds, you have a wide range of options to invest. Right from Gold Funds, Monthly Income Funds, Sectoral Funds, Arbitrage Funds, NFO, etc.
12. Tax- Saving VariantsThere is a kind of Fixed Deposit known as Tax Saver Fixed Deposit, that have fixed interest rate of 7-7.75%, in which the investor can claim a tax deduction up to 1.5 lakh under Section 80(c) and has a lock-in period of 5 years.With Mutual Funds, Fisdom provides top saving ELSS Mutual Funds which can claim a tax deduction up to 1.5 lakh under Section 80(c). They come with a lock-in period of just 3 years and the returns are over 15%. Read More on Tax Saving Mutual Funds.
13. Tax BenefitsThe returns from Fixed Deposits are taxable according to the tax slab you fall into, regardless of the investment period. Banks also deduct TDS (Tax Deducted at Source) between 10-20%. So the post-tax return is more like 5%-6%Mutual Funds have great Tax Benefits:
  • Tax deductions up to 1.5 lakh under Section 80(c).
  • Long Term Capital Gains (>1 year) from Equity Mutual Funds are tax-free.
  • Short Term Capital Gains (<1 year) from Equity Mutual Funds are taxable at 15%. Read More: Tax Benefits with Mutual Funds.
14. RetirementFixed Deposits are popular amongst retirees, just because of its convenience and ease of operation. However, the returns are minimal.  With Fisdom , you can make better returns (12 – 14%) on your retirement corpus by investing in the National Pension System (NPS). Read More: My Retirement with NPS
15. Inflation cover Fixed Deposits interest rate is between 7 – 8% and the average inflation rate in India is about 4%. It implies that Fixed Deposits don’t actually provide for inflation, making them a risky investment.Mutual Funds let you invest in plans that have provided returns more than 15%, thus helping you beat inflation.

Hope this article helped you to understand the differences between Fixed Deposits and Mutual Funds. After all, you have worked hard to receive your income, it only makes sense to make an investment in which the income can work for you.

Don’t Delay! Start investing in Mutual Funds today with Fisdom .  

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