Fixed deposits and mutual funds are two of the common investing possibilities. Both choices give investors with attractive returns to help them reach their goals well inside time. Where fixed deposits offer guaranteed returns at pre-set interest rates, mutual fund investments provide variable returns depending upon how the market performs.
Mutual funds is the best way as compared to fixed deposit
Investments are made typically to increase rewards and decrease risks. However, there might be specific goals also for investing like predictable monthly returns or wealth creation over the long term and so on. There are several investment possibilities accessible in the market, and as an investor; you may be faced with the difficulty of picking one product over another. So, what would you select when it comes to mutual fund vs fixed deposits? Not sure? Read on to gain a better idea.
Fixed Deposits (FDs) have been a part of every Indian family for decades now. The present times, however, are witnessing a collapse in FDs with a notable transition toward debt mutual funds. In this post, let’s analyze why debt mutual funds are preferable than fixed deposits.
There was a time when every excess cash – bonus and increment – went on to be invested in bank FDs. Our grandparents and parents have all ended up depositing their money in FDs at least once in their lifetime. It was the finest alternative to earn interest while maintaining capital protection.
What has changed now?
Mutual funds have risen to the fore in the recent few years. As a result, FDs have lost their luster as the most popular long-term investment aim. During the demonetisation in 2016, mutual funds were able to cash in on the opportunity that became available due to the reduced deposit return rates. Also, due to the availability of tax saving mutual funds, mutual funds gained to prominence. When debt funds started delivering larger returns with liquidity, many low-risk investors decided to jump ship.
Fixed Deposits are the typical investment choice for most Indian households. As per RBI data released in June 2020, 53 percent of typical family financial assets are invested in Bank FDs (as on March 2020). (as on March 2020). Though mutual funds have a long history in India with setting up of Unit Trust of India in 1963, popularity of mutual funds among retail investors have developed only in the recent 20 – 25 years. As per AMFI data, AUM of mutual funds in India has increased at CAGR of about 17 percent over the last 20 years. Despite the tremendous expansion, RBI analysis reveals that mutual funds account barely 7 percent of household savings. We will compare FD vs mutual fund so that investors can make informed decision on whether to invest in FD or mutual funds.
Safety of FD versus mutual funds
When FD vs mutual fund is compared, FDs are believed to be the safest investment because of assured interest and principal on maturity. Though FDs are regarded to be risk-free investments, investors should remember that the liquidity and safety of FD depends on the financial stability of the bank/ financial institutions. Banks are governed by RBI, which strives to guarantee prudential lending regulations so that depositor’s money is safe.
However, multiple examples of infractions of RBI norms have been recorded in the recent past leaving depositors in the lurch. Such situations can trigger suspension of withdrawal, limits put on how much you can withdraw and perhaps not being able to withdraw your money forever depending on the situation. Such unfortunate events aside, FDs are by and large highly safe and guarantee you assured profits.
While comparing mutual fund vs fixed deposit, mutual funds diversify risks by investing in a portfolio of equities or bonds. However, mutual funds are vulnerable to market risks and there is no security of returns unlike FDs. Varying mutual funds including equities funds and debt mutual funds have different risk profiles. Equity as an asset class is much more volatile than debt funds but has the potential of substantial returns over a long investment horizon compared to debt funds. Equity funds are ideal for long term investing goals whereas debt funds are suitable for short to medium term aims. Therefore, investors should always invest according to their financial goals and risk appetite. Moderately high to high risk appetite profile investors can select equities funds while those who can accept only moderate to low risk can invest in debt funds.
Generally, the rate of return in mutual funds is higher than it is in fixed deposits. It is because mutual funds give exposure to market-linked investment such as stock and debt instruments. Funds in a mutual fund are successfully handled by expert fund managers and they keep on allocating funds where the returns can be optimum. This leads to better returns.
Choosing between these two possibilities takes comprehensive investigation, additionally, comprehension of one’s risk-return appetite. While mutual funds come with a solid blend of risk-return, FDs help strike the correct balance in one’s portfolio since these do not have any big risk label associated to them.