A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective. A mutual fund is just a medium of method of investment. Through this medium of mutual funds, investors can indirectly invest in different asset classes – debt securities, equity securities, gold and real estate. An equity fund would buy equity assets – ordinary shares, preference shares, warrants, etc. A bond fund would buy debt instruments such as debenture bonds, or government securities or money market securities. A balanced fund will have a mix of equity assets and debt instruments. Mutual fund shareholder or a unit holder is a part owner of the fund’s assets. Mutual funds are managed by financial experts like portfolio managers and investment bankers.
Advantages of Mutual Funds:
- PROFESSIONAL MANAGEMENT
There are so many lucrative opportunities out there in the investment market. But ensuring the gains with high degree of possibility involves:
- Fundamental and Technical Research
- Identify and exploit opportunities
- Continuous tracking of investments
- Timing: when to buy/ sell?
That’s a really huge and complex task which requires professional knowledge. Well, Mutual Funds makes professional management of investments very affordable.
“Not putting all the eggs in one basket” is the lesson we learnt in our childhood. That’s very simple way of telling what diversification means. But with limited amount of money one has, there is not enough room to diversify well. Thus, mutual funds make it possible to diversify your money across large number of investments.
- ECONOMY OF SCALE
- HIGHER POST TAX RETURNS
A fixed deposit is a traditional financial instrument offered by banks. Fixed deposits provide rate of interest higher than regular savings account. They offer fixed rate of interest for a pre-specified tenure. Fixed deposits come with a pre-defined maturity period. Banks may charge a penalty for pre-mature withdrawal. Fixed Deposits are considered to be safe investments. Banks also offer Recurring Deposits and Flexi Fixed Deposits.
Advantages of Fixed Deposits:
Bank fixed deposits are considered to safe heavens of investments with “NO” risks.
- Assured rate of return
- Tax threshold for interest
- Flexible tenure
- Easy liquidation
Differences between Mutual Funds and Fixed Deposits
|Parameters||Mutual Funds||Fixed Deposits|
|Rate of returns||No assured returns||Fixed returns|
|Inflated adjusted returns||Potential for higher inflation adjusted returns||Usually low inflation adjusted returns|
|Risk||Medium to high risk||Low risk|
|Liquidity||Liquid||Medium to low liquidity|
|Premature withdrawal||Allowed with exit load (if applicable)||Allowed with penalty|
|Cost of investment||Based on total expense ratio||No cost of investment|
Final Verdict: Which is better?
Fixed deposits are traditional investment instruments that provide a higher and assured rate of interest than a regular savings account. These deposits are covered by the Deposit Insurance and Credit Guarantee Corporation, which guarantees an amount of up to Rs 1,00,000 per depositor per bank. The Rate of Interest on fixed deposits is fixed for a pre-specified Tenure. Compared to bank fixed deposits, debt mutual funds have the potential to offer higher inflation-adjusted returns. Fixed deposits are suitable for investors with low risk appetite.
Various type of mutual funds are available for investors across risk appetite but there is no assurance on returns like in the case of fixed deposits. Premature withdrawal of fixed deposits may be allowed but with a penalty charged by the bank. Early redemption from mutual funds may be subject to exit load, if applicable. Mutual funds offer tax efficiencies if the holding period is more than 36 months as per current tax laws.
Hence, consider your risk appetite, investment time horizon and your return expectation whole choosing between fixed deposits and/ or mutual funds.