Mutual Funds vs. Fixed Deposits: Which is a Better Investment Option?

Benefits of Mutual Funds

There are several reasons why mutual funds are one of the most popular investment plans. Some of them are:

• Professional Services
  Mutual funds are managed by fund managers who are well-trained and highly knowledgeable in their field. Hence, you get high-quality professional services.
• Benefit of Dividends
  Several companies pay dividends to their shareholders. So, depending on the type of mutual fund, you may receive dividends that can be reinvested.
• Diversification of Portfolio
  Mutual funds invest in a diversified portfolio of assets like stocks, bonds, or other securities. They can bring more balance to your portfolio.
• Comparatively Stable Returns
  Compared to various other stock market investments, mutual funds are more stable. You may expect decent returns over a tenure.

Things To Keep in Mind When Investing in Mutual Funds

All types of investment plans have certain limitations. To this, mutual funds are no exception.

Keep in mind the following aspects of mutual funds:

1. There are market risks associated, and so, returns can be volatile and uncertain.
2. The mutual fund house may also charge certain fees, like the expense ratio and fund management charges.
3. Since the funds are managed by the fund house, the shareholder has limited control over their investments.

Taxation

• Short-term capital gains (less than 2 2-year holding period) will be taxed at the taxpayer's slab rate. In some cases, it is taxed at 20%, which was earlier 15%.
• Long-term capital gains (listed securities with over 24 months of holding period) will be taxed at 12.5%.
• Note: Long-term capital gains on debt funds no longer offer indexation benefits.

What is a Fixed Deposit?

For most Indians, fixed deposits have always been one of the most popular investment plans. In a fixed deposit, the investor invests a lump-sum amount for a fixed tenure. The interest rate fixed at the time of account opening remains unchanged throughout the tenure. All banks, NBFCs (Non-Banking Financial Companies), and HFCs (Housing Finance Companies) typically offer fixed deposits.

Benefits of Fixed Deposits

Fixed deposits offer a range of benefits to the investor. The reasons why it has been a popular investment tool among all types of investors are:

• Guaranteed Returns
  The interest rate remains unchanged and unaffected by the market conditions throughout the tenure, therefore, fixed deposits offer guaranteed returns.
• Can Get a Loan Against FDs
  In most cases, your bank may let you avail a loan against a certain percentage of FD’s principal amount. So, you need not break FDs in times of need.
• A Safe Investment
  Compared to market-linked investment plans, fixed deposits are considered safer and more stable. If you are not willing to take market risks, FDs can be the right choice.
• The Benefit of Compound Interest
  FDs may offer compound interest that can be reinvested. Hence, you can expect a higher overall return.
  Note: Interest rates on fixed deposits may range between 2.80% per annum to 7.75% per annum, depending on the tenure, principal invested, and the type of FD. Senior citizens generally enjoy a higher rate of interest.

Things To Keep in Mind When Investing in Fixed Deposits

Fixed Deposits, too, have certain limitations. Take a look:

1. The interest rates are fixed and are quite lower as compared to market-linked instruments. Because of this, FDs may not be able to beat inflation at all times.
2. Returns may be quite low compared to various other investments.
3. FDs also have limited liquidity scope. Premature breaking of FD may cost you a penalty, thus decreasing returns.

Taxation

Interests earned in fixed deposits fall under the taxable income of individuals (Income from Other Sources). So, it is taxed as per the taxpayer's slab rate. TDS (Tax Deducted at Source) is deducted if the interest that you earn in a financial year is over ₹40,000 (for non-senior citizens). For seniors over the age of 60, the limit is set at ₹50,000.

Note: If interest on FD (of up to ₹50 lakhs) is the sole income of the individual, there will be no income tax charged!³

Which is Better: Fixed Deposit or Mutual Funds?

Unfortunately, there cannot be a single answer to this long-debated question. To make your decision easier, we’ve broken down a few key factors you should consider in order to pick the best investment plan:

• Your Risk Appetite
  As discussed above, mutual funds and FDs have different risk levels. While FDs hardly have any associated market risks, they offer stable and guaranteed returns. On the other hand, mutual funds are market-linked investments. So, both risks and rewards have high potential.
• Financial Goals
  If you are planning for wealth creation, mutual funds may be a good idea. However, if you are looking at stable returns, FDs may be the right choice.
• Tenure for Investment
  An FD can be done for as little as 7 days and may go up to 10 years or more. While there is no lock-in in most mutual funds, experts suggest MFs offer decent returns when you stay invested for over a few years.
• Protection Against Inflation
  Owing to the lower interest rate, FDs can rarely beat inflation; most mutual funds often can.

Conclusion

Mutual funds and fixed deposits are both highly popular investment plans. Assessing your risk appetite and future financial goals can help you choose the right one. If you are willing to play it safe, fixed deposits may be the right choice. However, if you want competitive returns and don’t mind taking a little risk, mutual funds can be a better bet. You can also invest in both. Why limit your investments? Enjoy the best of both worlds with a balanced portfolio.

At Jio Insurance Broking, you may compare various investment plans to choose the best one for your needs. Get started today!