Fixed Deposit Vs Mutual Fund: Which Is Better?

Investing your money takes a lot of rethinking and expertise due to the time involved. Lately, the mindset of people in investments has been shifting to high returns, irrespective of the risks involved. Some of the reasons being consistent economic downturns, job insecurity, unemployment, demanding lifestyles, and unpredictable RBI norms. Investments are a part and parcel of life as they help ease the tax deductions and form a chunk of everyone’s savings. Choosing the right investment is tricky and often remain wary of the returns. Planning is the key and plays a decisive part to optimize returns with negligible risk.

Fixed Deposit: Lifeline Of Investments

In India, Fixed Deposits have been the saviour - a safe investment with good returns and easy procedure to open the account. They have been the most favoured investment even to this date and will continue to do so in the future. Fixed deposits gained popularity because of its guaranteed returns. People from all strata are drawn towards it as it is secure in all ways. The interest rate is fixed and remains the same even at the closure of the account. They are offered by private and public sector banks, small finance banks (SFBs), non-banking financial companies (NBFCs), and post offices. There is a catch though, unlike the mainstream commercial banks, the interest rates paid by small banks is higher. FDs with a fixed tenure helps in procuring a loan and support people in need of desperate funds. Some banks offer substantial loans of up to 90% against your fixed deposit. Moreover, your FD will prolong and earn the interest in avoiding premature withdrawal, and avert paying a penalty. What makes this a widely preferred investment is its flexible tenure ranging from 7 days to 10 years.

Mutual Funds: An Impressive Option

Mutual Funds shares only one thing in common with FD, it’s an investment. Otherwise, the approach is contrasting because here money is collected from people and invested in various assets. The investments are in financial securities like shares and money-market instruments like the certificate of deposit and bonds. Apparently, the duration of the investment may be a short term, medium-term, or long term with appreciable returns. The categorization of mutual funds relies on the investment goal of the fund. Few investors seek capital protection and safe returns, others have a strong risk appetite and look for higher returns. Ultimately, it all comes down to how the market behaves as it is directly proportional to current performance. This parameter often dampens the enthusiasm of investors as it largely affects the returns. It’s right now garnering ample attention among the masses.

Fixed Deposit Vs Mutual Fund: Recent Performance

2018 was rather gloomy for both seasoned and novice investors. Fixed deposits yielded an upwards return of 6.5% and 7.1% respectively on their capital investment. On the other hand, mutual funds were disappointing as most of the high-performing mutual funds of 2017 failed to earn even the nominal savings bank account interest. The forecast for 2019 is pretty hopeful and optimistic with FDs continuing to carry on the good run, with interest rates going up. A positive sign being banks offering upwards of 7% even for a 1-year deposit. It might work wonders for senior citizens where interest rates are in the range of 7.5-9.25%.

Which Is Better?

Mutual funds attract more investors from tier-one cities than tier 2 and 3 cities due to being a lack of knowledge. A fixed deposit has more takers due to its steady track record. FD scores high against mutual funds as they are risk-free, reliable, liquid, and favours a tax saving option as well. However, the difficulty lies in safety since it comes at a cost of much lower returns which falls short to beat inflation in certain years. It’s quite evident that as investors it is therefore advisable to have a diversified portfolio with both FD and mutual fund investments. However, invest in the latter only after assessing the risks involved. For beginners, avoid agents who coax you to invest the hard-earned savings. Essentially, it all sums up to one thing how much can you save? To start with, FD will be the right choice over mutual funds as its safe, simple, and reliable. The returns are on the lower side but risk-free though, mutual funds can’t be ignored as an alternative.