mutual funds

Do mutual funds outperform bank deposits?


The financial market today is filled with investment options where a variety of financial instruments are available for different types of investors. On in-depth research, you may find that fixed deposits and mutual funds are the highly preferred investment options available in the market. Read on to understand the difference between both options and which option may suit your risk appetite level.

What is a mutual fund?

In India, mutual funds are a popular investment choice as they come with moderate to high risk and may offer high returns. They are professionally managed and invest your corpus in rewarding options. Note that mutual fund professionals generally review the market and match it with your goals to fetch appealing returns.

Important features of a mutual fund are –

  • You may begin with your mutual fund investment journey through an SIP (Systematic investment plan) with minimal investable amount of as low as Rs 500 per month. Investing in a mutual fund directly without any intermediary even helps you to save on commission and brokerage fees.
  •       Professional fund managers in the capital market, like chief financial analysts, manage mutual fund investments. Such professionals conduct extensive market research and in-depth study about market fluctuations for making an informed decision.
  • Besides providing professional management, mutual funds even endow you with disciplined investment. An SIP (Systematic Investment Plan) in mutual funds assists you to form a steady investing habit. You as an investor can even opt for an auto deduction option for the SIP route in a mutual fund. In auto-debit mode, a fixed amount as per your convenience is automatically deducted from your bank account on a predetermined date.

What is a fixed deposit?

Fixed deposits are even addressed as term deposits. They are a prudent choice for you if you are a conservative investor, as such investment options help to lock in your funds for a fixed time period at a fixed interest rate. Such deposits are prudent as they do not lead to corpus loss and assist your investment to grow in a steady manner. They can be opened easily with a financial institution or bank through offline or online mode upon submitting the necessary filled-out form and personal documents. The appealing feature of fixed deposits is that they have minimal investment risks. Your parking in fixed deposit is backed by an insurance cover by the DICGC (Deposit Insurance and Credit Guarantee Corporation), RBI’s subsidiary. This scheme ensures to cover deposits of up to Rs 5 lakh per depositor per bank in the event of bank failure.

The top advantages of fixed deposits include –

  • Fixed deposit provides the features of a safe investment. This is because such deposits are highly rated by the RBI, and thus the risk of scams and fraud are negligible.
  • Fixed deposits offer you assured returns on investments. They are highly convenient as they can be opened easily with just a click on the screen.
  • Fixed deposits play a massive role in offering tax benefit. Such deposits offer you tax deductions as per Section 80 C on 5-year tax saver fixed deposit.

Fixed deposits come in distinct kinds and thus according to your financial goal and objective, you can select the kind of fixed deposit you want to invest in. You might opt for a non-cumulative deposit option to earn regular income on your investments or a cumulative one to get the compounding benefit.

Investing in fixed deposit vs mutual fund

While both kinds of investment options hold a fair share of benefits, there are major distinctions between the two.

  • Investment return – A mutual fund may offer you a higher return if you remain invested for a long time period of 5 years and above as compared to a fixed deposit. However, a fixed deposit may offer you a fixed return amount on your investment.
  • Capital appreciation – According to past trends, a mutual fund is usually suitable for high capital appreciation. However, parking investments in fixed deposits may provide assured returns and capital security to your investment corpus for the tenure.
  • Liquidity – Mutual funds usually are open-ended with no lock-in period. Thus, they offer higher liquidity than fixed deposits. However, few funds may charge an exit load, which adds to your investment cost. Fixed deposits may allow premature withdrawal of your investment too. However, banks may levy a premature withdrawal charge of as high as 1 per cent. This withdrawal charge is deducted from your fixed deposit effective rate of interest.

Ending note

If you are a risk-averse individual, you may refrain from investing your investible in mutual funds and instead may put your funds in a fixed deposit, thinking the latter to be a safer and secure investment choice. However, over the long run, mutual funds hold the potential to offer fixed asset and inflation-beating returns. Moreover, mutual funds are extremely liquid and more tax efficient than fixed deposits. So, according to the criteria discussed above, a mutual fund is a better investment choice than a fixed deposit if you are looking to invest to meet your long-term financial goals. However, if you want to attain your short-term financial goals, then you may consider investing in fixed deposit as this instrument offers capital protection and provides assured returns. Mutual funds, on the other hand, may not provide the desired returns as they tend to be volatile during the short term.

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