Fixed Deposit vs Mutual Funds: Which is Better In 2021

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Introduction to Fixed Deposit vs Mutual Funds

Fixed deposit and mutual funds are two types of saving schemes offered by the banks and NBFCs in India. It is a topic of debate that has been doing rounds in India, whether a fixed deposit is a good option or a mutual fund is a better option.

Till a few, years ago risk-averse investors believed that investing money in fixed deposits is a better option.

But, the market scenario has changed because many mutual fund companies have come up with interest debt mutual fund schemes with guaranteed returns alongside capital appreciations.

There is no simple answer to the question of whether an investor should invest in fixed deposits or mutual funds. Let’s analyze some key factors and do a comparison between fixed deposits and mutual funds.

What is a fixed deposit?

A fixed deposit is a great way to invest your money and see it grow. Fixed deposits enable an individual to deposit a lump sum amount with a bank or financial institution and he/she can select the tenure for which they want to invest the money.

In return, individuals earn interest rates once a pre-decided tenure is completed. Investors get guaranteed returns on their deposit, they can choose to get their interest periodically or at maturity.

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Generally, it is not allowed to withdraw the FD before completion of the tenure but some lenders may allow it by charging a penalty for the same.

Benefits of fixed deposit 

  • 1. Safer option- An investor should not worry about the safety of their money because all the banks and NBFCs in India are regulated by the Reserve Bank of India and the central bank is regulated by the government of India. Such tight and strict regulation means that an investor will receive the principal amount at the end of the tenure.
  • Get Insurance coverage- Investors are offered insurance coverage on the fixed deposit account. Banks offer insurance for up to Rs 1 lakh of the amount deposited in the fixed deposit account.
  • Higher rate of interest- Banks and NBFCs in India offers a higher interest rate on the fixed deposit account. Generally, the interest rate on fixed deposits ranges between 3%-7%.
  • Flexible tenure- Fixed deposit accounts come with a flexible tenure, one can opt to invest the money for a shorter period or a longer-term. You can invest money for as less as 7 days and as long as 10 years.

What is a mutual fund?

Mutual funds are an investment tool that is of three types Debt, Equity, and Balanced. Under this investment, scheme money is pooled in from investors, and that money is used to buy securities like stocks and bonds. The rate of return is not fixed in mutual funds but it is observed that it gives a return of 10-15%.

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Benefits of mutual funds

  • Diversification– The biggest advantage of investing money in mutual funds is that it gives diversification. The money is invested in different stocks which means that all the eggs are not placed in the same basket meaning there are fewer chances that all the stocks will go down at the same time, so it reduces the risk.
  • Professional Management- Your mutual fund is managed professionally by the managers. The qualified managers are provided by Asset Management Companies (AMCs). The managers keep a check on your investments and suggest when one should sell or buy the funds.
  • Affordability- An investor can invest as low as Rs 1000 in mutual funds. This does not mean that his/her money will not be pooled into to buy big company’s share. Even if you invest less money there are chances that your money will be plugged in to buy shares of big company.
  • Liquidity- Whenever you need money it can be easily withdrawn without paying any penalty. The amount that you receive at that time is the current value of the units.
  • Tax Benefits- If you want to avail tax benefits then you should invest in schemes like Equity Linked Savings Schemes (ELSS). These schemes qualify for tax deductions under Section 80C of the Income Tax Act. There is no tax on capital gains on units of equity schemes held for more than 12 months.
  • Well Regulated- The mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which means that mutual funds are required to follow the norms laid down by SEBI, which are in the interest of investors. The companies also have to release their portfolio every month for transparency.
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Comparison between Fixed deposit and mutual funds

ParticularsFixed depositMutual funds
SafetyEarn guaranteed returns at the end of the tenureGuaranteed returns are not assured
Market fluctuationsPrices remain unaffectedReturns are volatile as per the market movement
RiskLowHigh
ExpensesNo extra cost has to be incurredManaging the account involves certain charges
WithdrawalPremature withdrawal is possible, but the penalty has to be paidMoney can be withdrawn at any time
TaxationTDS deduction at 10% according to the income tax slabMutual funds are subject to short-term and long-term capital gains tax.

Which is better, FD or Mutual Fund?

The decision to invest in a fixed deposit or mutual fund is completely dependent on the investor, how much extra money he wants to park.

If you are young and can take a risk with your money then you can invest in mutual funds. On the other hand, elderly people and people with low income should invest in fixed deposits. It is your money so you can make a better decision, so decide wisely.

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