FDs vs Mutual Funds: Understanding the Basics

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Fixed Deposits (FDs) and Mutual Funds (MFs) are two of the most popular investment options in India, each serving different purposes and catering to different types of investors.

Let’s dive deeper into their characteristics, benefits, risks, and key differences to help you make a more informed choice.

What are Fixed Deposits (FDs)?

Fixed deposits are savings products offered by banks and financial institutions where you deposit a fixed sum of money for a specified period, typically earning a predetermined interest rate. FDs provide a guaranteed return, making them a preferred choice for risk-averse investors.

• Nature of Investment: When you invest in an FD, you deposit a lump sum that earns interest at a fixed rate. This rate is set at the time of deposit and remains constant regardless of market conditions.

• Risk Profile: FDs are considered very low-risk as they offer assured returns. The principal and interest are generally safe, given that FDs are regulated by the Reserve Bank of India (RBI) and insured up to a certain limit.

• Returns: The returns on FDs are fixed, and while they may be lower than other investment options, they provide stability and predictability.

What are Mutual Funds?

Mutual funds pool money from multiple investors, which professional fund managers then allocate to a diversified portfolio of assets, such as stocks, bonds, or money market instruments. The goal is to generate returns based on market performance, which means that mutual funds carry varying levels of risk and potential reward.

• Nature of Investment: Mutual funds invest in different types of assets, including equities, debt instruments, and other securities. They offer a wide range of choices, from equity mutual funds (high-risk, high-return potential) to debt mutual funds (lower risk, stable returns).

• Risk Profile: Mutual funds are subject to market risks, meaning returns can fluctuate. Equity funds tend to be more volatile than debt funds, and investors may face a risk of loss, particularly in the short term.

• Returns: Unlike FDs, returns on mutual funds are not guaranteed and depend on market performance. Historically, equity mutual funds have offered higher returns over the long term compared to FDs, although they are also riskier.

Fixed Deposits vs Mutual Funds – A Comparative Analysis

1. Risk Profile

• FDs: Very low-risk, as they offer assured returns. The principal amount and interest are protected against market fluctuations.

• Mutual Funds: Carry varying levels of risk based on the type of fund. Equity funds can be volatile, while debt funds are generally safer.

  
  

2. Returns

• FDs: Offer fixed returns, typically lower than potential mutual fund returns.

• Mutual Funds: Returns are market-linked and can be higher than FDs over the long term. However, they are not guaranteed and depend on the fund’s performance.

  
  

3. Liquidity

• FDs: Medium to high liquidity, depending on the terms. While most banks allow premature withdrawal, it may incur a penalty.

• Mutual Funds: Open-ended mutual funds offer high liquidity, allowing you to redeem units at any time at the prevailing NAV. However, some funds have exit loads if withdrawn within a specified period.

  
  

4. Taxation

• FDs: Interest earned on FDs is added to your total income and taxed according to your income tax slab. TDS is deducted if interest exceeds ₹40,000 (₹50,000 for senior citizens).

• Mutual Funds: Taxed based on the type of fund and holding period:

  • Equity Funds: 20% tax on short-term capital gains (STCG) if held for less than 12 months. For long-term capital gains (LTCG) held for over 12 months, a 12.5% tax applies on gains exceeding ₹1.25 lakh.

  • Debt Funds: Taxed as per income slab.

Comparison:

Factors	Fixed Deposits (FDs)	Mutual Funds
Risk	Low risk, fixed returns	Market-linked, varies by fund type
Returns	Assured, typically lower	Potentially higher but not guaranteed
Liquidity	Medium (penalty on early withdrawal)	High for open-ended funds
Taxation	Income tax slab rate on interest	Depends on holding period and fund type
Investment Horizon	Short to medium-term	Medium to long-term for better growth

Conclusion

Both FDs and mutual funds have unique benefits suited to different financial needs and risk profiles. Fixed deposits are ideal for those seeking stable, assured returns with minimal risk. Mutual funds, on the other hand, offer higher potential returns over the long term but come with market-related risks.

When choosing between FDs and mutual funds, consider your risk tolerance, investment horizon, tax implications, and financial goals. Diversifying across both options can also help balance risk and reward, creating a well-rounded portfolio that aligns with your long-term financial aspirations.

P.S. if you are thinking of mutual funds, Download Miles Wealth, we offer personalised mutual funds tailored to users’ risk tolerance and financial goals, eliminating the need of investing knowledge or hours spending on research, invest in funds that suits YOU.

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