5 Differences Between an FD and a Mutual Fund
Fixed Deposits and mutual funds have always been popular financial planning tools. However, they may offer different benefits to different investors. Click here to find out the 5 points of difference between FD and mutual funds.
For decades, fixed deposits (FDs) were the obvious choice for investors. Their stability and returns (higher than a savings account) appealed to the sensibilities of the previous generations. However, with the introduction of mutual funds, a lot of investors changed lanes. Today, FDs and mutual funds remain two modern financial tools. Find out the difference between FD and mutual fund and which of these is a better pick for you.
What is a Fixed Deposit?
An FD is an investment instrument that offers a fixed rate of interest for a fixed tenure. It is provided by most banks and NBFCs (Non-Banking Financial Companies). The interest rate is determined at the beginning of the tenure.
What is a Mutual Fund?
A mutual fund is a fund that pools money from various investors and invests in securities like stocks, bonds, etc. The returns are variable and distributed amongst all investors as per their investments.
FD vs mutual fund: What are the differences?
To know whether you should pick an FD or mutual fund, you should also know their differences. Here are 5 points of difference between FD and mutual funds.
The rate of return for an FD is guaranteed, fixed, and can vary between 6 to 8% per annum. On the other hand, mutual funds do not have a fixed rate of return. The returns are variable and depend on the type of mutual fund, the performance of the market, the investment tenure, etc. For example, equity mutual funds can offer up to 12 to 13% returns over the long term, while debt funds can offer 7 to 9%.
FDs offer guaranteed returns, so the risk involved is practically zero. Mutual funds, on the other contrary, offer varying degrees of risk depending on the asset class, investment term, and market fluctuations. The returns are not guaranteed and can oscillate over time. However, mutual funds also offer better returns than FDs.
You can open an FD with a bank or NBFC. Moreover, you can only make one lump sum contribution at the time of opening the deposit. In comparison, mutual funds can be opened directly with the mutual fund house or indirectly through a broker. Mutual funds also offer two investment methods – in a lump sum or via SIPs (Systematic Investment Plans).
Also Read: Which are the best Tax Saving Mutual Funds?
FDs offer low liquidity. They have a fixed tenure and any pre-withdrawals result in a penalty. However, mutual funds are highly liquid, and there are no penalties for early withdrawals. But there may be an exit load charged when you redeem your funds.
The interest earned on the maturity of your FD is added to your income. It is taxed according to your tax slab. The taxation on the withdrawals of mutual funds is slightly different. You are taxed short-term capital gains or long-term capital gains according to the holding period.
Impact of Inflation
The returns from FDs may not be enough to counter inflation. Inflation eats into your savings. In the case of high inflation scenario, you would end up getting a negative return. Moreover, the interest rate for an FD is decided at the time of opening the deposit and remains the same with no increase. But mutual funds can offer inflation-adjusted returns.
So, what should you choose: FD or Mutual fund?
Mutual funds can offer you inflation-adjusted returns and faster growth as compared to FDs. However, they come with risks. Although you can always choose the risk as per your suitability, there will always be some degree of risk involved with mutual funds. In con/trast, FDs provide you with stability and a guaranty, but the returns are low and eventually lose value compared to inflation.
Additional Read: 7 Reasons to Invest in Mutual Funds
The right choice between FD vs mutual fund can be made after analyzing your own needs and financial objectives. Now that you know the difference between FD and mutual fund, you can make an informed decision.
Additional Read: Investing in mutual funds? Here's all you need to know
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