Choosing one from the two can be difficult if you are considering investing in fixed deposits or mutual funds. This is because the market risk involved in fixed deposits is relatively low compared to mutual funds.
In addition, banks offer fixed deposit schemes, whereas fund houses and asset management firms offer mutual funds. So, it is very important to consider the differences between FD vs Mutual Fund before investing money.
Overview of Fixed Deposit
There are several non-banking financial companies (NBFCs) as well as banks that offer fixed deposit schemes as an investment option. The financial institution allows users to deposit the amount of money in a lump sum for a specific period with a fixed tenure. A fixed deposit is considered the safest investment instrument among many others.
Overview of Mutual Funds
A mutual fund is another investment instrument in which individuals and institutions pool their funds. The fund manager purchases securities from the market through the investment mandate, such as bonds and stocks. The mutual fund market appears to be one of the best ways to diversify a portfolio of investments.
Listed below are some of the differences between FD vs Mutual Funds based on various factors.
Based on returns
Investing in a fixed deposit makes you more aware of what you can expect before the timeframe is over. In a fixed deposit, the rate of return is predefined over a predetermined period. You will undoubtedly earn the specified interest rate on your amount invested if you keep it secured for the period stipulated by the bank. Mutual Funds focus primarily on investing in equity and debt instruments, which means that the returns on them are entirely reliant on the performance of the market. So, knowing the difference between FD vs Mutual Fund is essential before investing your hard-earned money.
Based on taxation
A Fixed Deposit’s interest is taxable according to the individual’s tax slab, while a Mutual Fund’s tax assessment depends on the holding period. As a result, a capital gain made in the short term pays taxes unexpectedly, and a capital increase is driven in the long run.
Based on Risk Factors
Fixed Deposits are virtually risk-free, and that’s why so many unassuming speculators grab them without thinking twice. However, market fluctuations affect the volume of returns for mutual funds, which poses a real risk.
Benefits of FD
Safe and secure returns
A fixed deposit does not involve any market risk since it is not a market-linked investment. A fixed deposit investment offers the same interest rate at the start and continues to do so throughout the tenure of the investment. You can also plan your financial future by knowing what to expect from your FD investment. Fixed deposits are one of the safest and most reliable ways to earn interest.
Encourages saving habits
Undoubtedly, everyone wishes to have some savings in an emergency. The habit of keeping money aside gets instilled in people with a fixed deposit. As investors enjoy excellent liquidity, they can borrow money against their fixed interest or prematurely withdraw it if they have emergency expenses. Many banks don’t even charge premature withdrawals, so the penalty is negligible.
Benefits of mutual funds
Scale-based economies of scale
Economies of scale also contribute to the lower transaction costs associated with mutual funds, which is another advantage. Buying and selling securities in large volumes, mutual funds incur much lower transaction costs than retail investors since they buy and sell securities through a broker.
Various products are available.
To match their risk profiles and investment objectives, various mutual funds are available to investors. The range of investment options available to meet the needs of different investors includes hybrid funds, debt funds, liquid funds, tax savings schemes, etc. A mutual fund can be geared to meet your specific needs and risk profile, which is one of the advantages of investing in mutual funds.