Differences Between Mutual Fund SIP and Fixed Deposits
With a growing change being seen in the financial market, potential investors are confused as to where they should invest their money in. An investor who is new to the financial market can easily be drawn into making a huge financial mistake that can cost him/her a lot more than just money.
With the financial market nowadays providing the potential investor various options where they can look to invest, it is quite natural for investors to get confused. Hence, it is not at all surprising to see that the potential investor getting confused between mutual fund SIP and fixed deposits.
What is a Mutual Fund?
Mutual funds are an investment vehicle which is usually run by an asset management company where investors can invest their money which is cumulatively put in securities, bonds, stocks etc. Mutual funds are registered with Securities and Exchange Board of India. The ones who are looking to invest a certain amount but are unsure as to where they should invest can look at mutual funds. The potential investor can also avail the guidance of professionals to make sure that the money invested bears fruits.
What are mutual fund SIPs?
When looking to invest in mutual funds, it always beneficial to start out by looking to invest through Systematic Investment Planning (SIP). This is because it enables the investor to start out with a minimum amount for a specific time period rather than investing a lump sum amount as is the case in fixed deposits. There are many kinds of mutual funds that exists in the financial market and one can look to invest in them through SIPs depending on the benefits that the investors are looking for.
What are fixed deposits?
Fixed Deposits (FDs) are the safest investment option available in the country as it is completely risk-free as well as guarantees safety of the money invested in it. It is the most sought after by the investors as there many benefits attached with FDs. Starting from providing a higher rate of interest as compared to regular savings account, availing loan as well as credit cards based on the FDs helps in fast tracking the process of selecting to invest in time deposits.
Difference Between Mutual Fund SIPs and Fixed Deposits (FDs)
Though investing in FDs as well as in mutual funds through SIPs provide benefits to the investors depending on the goals they are looking to fulfil, there are certain differences among the two. Here, we take a look at the differences:
- Amount Invested - The first difference that stands out among the two is the amount that the potential investor can look to invest. Unlike in FDs, one does not need to a huge lump sum amount to start investing in mutual funds through SIPs. One can start investing from as low as Rs. 500 which is quite beneficial for the one looking to invest.
- Rate of Interest - The rate of interest offered on FDs is constant for the entire period and is pre-specified which is not the case in mutual funds. The interest rates offered in mutual funds tend to vary based on the market movement.
- Risk involved - As stated that the rate of returns are constant for FDs, those who invest in FDs need not worry of their investments as they are assured that the amount deposited can be withdrawn without any loss. However, that is not relevant in the case of mutual funds. This is because the rates of interest offered in mutual funds tend to fluctuate depending on market conditions. In short, risks associated with investing in mutual funds even through SIPs is more than investing in FDs.
- Value of money - One invests his/her money, the prime motive behind it is to get good returns which can be put to work as and when needed. However, that is not always the case in today's world, all thanks to inflation. So, it is imperative to take into account the inflation rate while considering to invest in FDs or mutual funds. It is worth mentioning that though the risks are higher when looking to invest in mutual funds, the inflation induced returns offered by mutual funds are better as compared to FDs.
- Withdrawal - Another difference is that one needs to pay a penalty if the amount deposited in the FD is withdrawn before the end of the tenure, for which it was initially deposited. However, one does not need to pay any penalty if the money is withdrawn after the minimum holding period.
- Cost of Investment - There is no cost of investment involved with regards to time deposits, which enables the investors to claim the entire rate of return. However, that is not possible in mutual funds as all of them involves a cost that varies according to the mutual funds one invests in.
- Rupee cost averaging - When it comes to rupee cost averaging, mutual fund SIPs outperform FDs as unlike mutual funds, FDs are not laced with this benefit. Courtesy this benefit, SIPs eradicates the need for timing the market. As the amount invested in the mutual funds is already fixed is deposited timely, the shares bought adjusts by itself depending on the market condition that prevails.
- Compounding power - This is another front where mutual fund SIPs score over term deposits. Though it holds true only when the investment are made for the long term, the money invested in mutual fund SIPs tend to grow aggressively. So, if one is looking for good returns from mutual funds, it is better to invest money for a long tenure as there is a good chance of great returns thanks to the power of compounding.
Hence, as seen in the differences there are certain fronts where both Mutual funds or Fixed Deposits score over each other.
FAQs on Differences Between Mutual Fund SIP and Fixed Deposits
- What is the mutual fund interest rate?
An investment in a mutual fund carries no interest rate. It makes money based on how well the market or industry it invests in is doing.
- Which is a better investment- FD or Mutual fund SIP?
An FD is a better choice in terms of risk because it carries none. A mutual fund has the advantage in terms of returns.
- What happens if you withdraw money prematurely from an FD or a mutual fund SIP?
If the money deposited in the FD is withdrawn before the term for which it was originally deposited, a penalty is charged. In the case of mutual fund SIP, if the money is withdrawn after the required minimum holding period you don’t have to pay any fee.
- How do I choose an investment plan?
Think about your personal goals before choosing an investment option, such as fixed deposits or SIPs. To ensure that you make the best investments, conduct in-depth market research or consult a financial advisor. You can use different tools to calculate the returns or rate of interest you would earn for different types of investments.
- Are mutual funds secure?
No, because mutual funds offer returns that are linked to the market, they do carry some risk related to market volatility.
- Is the interest on fixed deposits taxed?
Yes, if the total of your fixed-term deposits' annual interest income exceeds Rs.40,000. If the interest exceeds Rs.50,000 for senior citizens, it is taxable (60 years of age and older).
- Are mutual fund SIPs exempt from tax?
If an investor makes SIP investments in equity funds or balanced mutual fund schemes, all gains made after a year will be treated as long-term capital gains and won't be taxed.
- Can I close my mutual fund SIP at any time?
Yes, you can cancel your SIP at any time. You only need to go to the investment platform you use and follow the instructions to cancel your SIP.
- Do fixed deposits have the option to be cancelled?
Yes, early withdrawals from fixed deposits are permitted in the event of an emergency or unforeseen obligations. However, if you prematurely withdraw from your fixed deposit, you might be charged a fee.
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