Why Mutual Funds are better than Fixed Deposit
Last Updated : Aug. 9, 2017, 6:22 p.m.
India is a land of culture and traditions. Here, people follow the practices of their fathers and grandfathers. Since security and saving of money is what each generation stress upon, fixed deposit attracts several people who wish to save a portion of their income. It is one of the traditionally accepted ways of investment as it assures the safety of the deposited amount and definite returns. These two factors held importance for the earlier generation to invest. But the times have changed now and with it has changed the living style of people. The aspirations and dreams are new and even the way economy functions have modified. From the starting of 2015, the Reserve Bank of India has reduced policy rate and in 2017 as well, the repo rate has been revised as a result of which the FD interest rates have further drop down.
Alternative to Fixed Deposit
With the continuous decline in the FD interest rate, it may not be the apt option for those who have started investing in past few years or are planning to start investing. So, what will be the ideal option to park the money? In the current scenario, the mutual fund would be a better option. This is because of the features that demarcate it from other modes of investments. The advantages of investing in mutual funds are as follows:
Benefits of Mutual Funds
- Eases diversification
- Low minimum investment amount is required
- Offers economies of scale, translating into better returns for you
- Provides innovative modes of investing and withdrawing – Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), Systematic Withdrawal Plans (SWPs), etc.
- Professional management of money by industry experts
Why Mutual Funds are Better than Fixed Deposit
Each individual has different investment objective and therefore may favour one form of investment over the other. The prime factor that influences the decision of pooling the money in the particular financial product is the returns on investment. The returns on FD are quite low. Whereas, the returns on mutual fund depends on stock performance and the volatility of the market conditions. The other factors that shouldn’t be overlooked and taken into account before investing are as follows:
Basic Difference Between Mutual Funds and Banks Fixed Deposit
The comparison will provide better picture and clarity about the two.
| Parameters | Mutual Funds | Fixed Deposits |
|---|---|---|
| Returns | No Assured Returns | Fixed Returns |
| Inflation Adjusted Returns | Potential for High Inflation-adjusted Returns | Usually Low Inflation-adjusted Returns |
| Risk | Medium to High Risk | Low Risk |
| Liquidity | High Liquidity | Medium to Low Liquidity |
| Premature Withdrawal | Allowed with Exit Load | Allowed with Penalty |
| Cost of Investment | Management Cost | No Cost |
| Tax Status | Favourable Tax Status | As Per Tax Slab |
Which is Better FD or SIP
In FD, the customer has to make the single deposit of lump sum amount for the definite time period. At the end of which he/she receives the stated interest. On the other hand, SIP is an organised mode of investing, where the predetermined amount is invested in the mutual fund at regular intervals. It is scheduled for a particular number of months and is a better option for those who do not have large lump sum amount. The difference between FD and SIP are provided in the table below:
| Basis | FD | SIP |
|---|---|---|
| Investment Mode | Single deposit | In installment |
| Nature of Return | Interest | Capital Gain, Dividend |
| Risk | Low risk | Higher risk |
| Tax | Applicable as per the respective slab of the depositor | Short term gain on equity fund: 15% Short term debt fund: At applicable slab rate Long term gain on equity fund: Tax Exempt Long term gain on debt fund: 20% with indexation benefit or 10% without indexation |
Disclaimer – Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.