Investments are a necessity to safeguard your money and secure your future. With the number of options available in the market, it is easy for investor to get confused about their investment choices. Here, we are decoding the two most popular investment choices, which are radically different from each other – Fixed Deposits and Mutual Funds.
Let us start with a brief understanding of both of them.
Fixed Deposits are the traditionally popular choice for investors. They have been one of the oldest and safest and trusted saving methods available to investors and depositors in India. Commonly known as FD, they are a much relied upon option offered by banks for both short and long-term investments. An FD’s return rate is fixed by the Indian government, which allows it to be unaffected by factors such as inflation.
Mutual funds are a market-based alternative with no fixed return rate. They end up offering return rates up to 15%, which is a lot higher than an FD’s return rate. Debt (more investment in corporate, government bonds, and securities than equity market), Balanced (partial investment in both debt and equity fund), and Equity (more investment in the equity market than in government, corporate bonds, and securities), are the three kinds of mutual funds.
This still leaves one with the dilemma regarding investment in Fixed Deposit or Mutual Fund. Read on to know more about both so that you can take an informed decision. Let’s understand each from the following perspectives.
When it comes to FDs, the returns are fixed. They remain the same throughout the investment tenure and will never affect the highest FD interest rates. Returns are linked to the market for mutual funds. Tenure matters in mutual funds as a more extended time means better returns.
The type and tenure of the FD usually determine the return rate so there is no spike in interest rate. On the contrary, return rates for Mutual Funds are linked to market and fund type.
The safest saving instrument is an FD since the returns are fixed while Mutual Funds have high risk due to their link to market volatility.
Since the return rate is pre-decided, FDs are not impacted by inflation. Conversely, Mutual Fund has inflation-adjusted returns so; it means if the market goes up, the person is in profit, and if the market goes down, the investor can suffer losses.
The invested amount in an FD is not liquid since it stays locked for a particular tenure. However, you can withdraw money as per requirement or take a loan against the deposited amount. Mutual Funds are also liquid since you can sell them at any point in time. However, experts suggest that the investors stand to lose if they withdraw after a short duration.
The dilemma between investing in a Fixed Deposit scheme or a Mutual Fund can be resolved by looking into these factors. It is essential to gauge the investor’s capacity for risk.