Mutual Funds Vs. Fixed Deposits

Both mutual funds as well as fixed deposits have long been considered to be very safe bets when it comes to investing one's money. They are generally low-risk forms of investment, which provide investors with good returns over a substantial period of time. However, there are certain differences between the two that make one form of investment more attractive than the other and vice versa.

Some of the main differences between mutual funds and fixed deposits are highlighted below:

1. Returns - Fixed deposits offer individuals a predetermined rate of interest over a specific period of time. This means that any money placed in a fixed deposit will only accrue a fixed amount of returns over a certain duration. However, an individual investing in mutual funds could potentially earn much higher returns since any investment made is based entirely on the market performance of the stocks in his or her portfolio.
2. Risk - Fixed deposits are essentially zero-risk investments, since they individuals already know beforehand what their returns are going to be over time. Since the rate of interest does not vary on fixed deposits, nor is it susceptible to market changes or volatility, investors are guaranteed a fixed return on their investment. Mutual funds on the other hand are fairly susceptible to change in the market, even though the amount of risk involved is spread over a range of stocks within the fund. Due to this, an investor could stand to gain more if market conditions are favourable, or could earn considerably less if conditions move in the opposite direction.
3. Costs - Investing in mutual funds come with certain costs or expenses in the form of fees paid to fund managers who take care of an investor's portfolio. Individuals investing in fixed deposits on the other hand do not incur such expenses since no intermediaries are required to handle the investment process.
4. Premature Withdrawal - Individuals who wish to make a premature withdrawal on their fixed deposits will, in all probability, be required to pay a penalty for doing so. Besides the penalty levied, the individual would also forfeit a portion of any returns he or she was expecting. In the case of mutual funds, premature withdrawals are permitted as long as the minimum holding period has been completed, although an exit load charge of 1% of the fund amount will be levied if a withdrawal takes place before the expiration of the holding period.
5. Taxation -So far as equity funds and hybrid funds are concerned, they will be regarded as short-term if the holding period is under 12 months and long-term if the holding period is over 12 months. In case of debt funds, a holding period of under 36 months will mean that they are short-term while a holding period of 36 months or more will mean that they are long-term. Long-term capital gains on equity mutual funds and hybrid mutual funds over Rs.1 lakh will be subject to tax at 10%, while short-term capital gains will attract 15%. In case of debt funds, the long-term capital gains will be 20% after indexation, while the short-term capital gains will be as per the tax slab. In the case of fixed deposits, any interest an individual earns on his or her investment is taxable depending on which tax slab the individual comes under.

From the information given above, it can be ascertained that both forms of investment have their own advantages and disadvantages. Hence, it is advisable for individuals looking to invest in either one, to spend a fair amount of time gathering information in order to help them make an informed decision.

Advantages of Investing in Mutual Funds