Deciding where to invest your hard-earned money can be tricky, especially when deciding between contrasting options like Mutual Funds (MFs) and Fixed Deposits (FDs).
Both offer unique advantages but cater to different financial goals and risk tolerances.
While seeking guaranteed returns and capital preservation, FDs might be your match. But if you have a long-term perspective and are comfortable with some volatility while chasing higher returns, MFs could be the key to unlocking your financial potential.
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Let’s take a look at what experts say in such a scenario.
Santosh Joseph, Founder of Refolio Investments and Germinate Investor Services LLP, says, “In Mutual Funds, especially within the fixed income category, there is a very wide variety of spectrum available even within the fixed income space. For example, you have an equivalent to FD, which is like a liquid fund or an overnight fund, even less duration-oriented, and you have corporate bond funds, credit risk funds and duration funds. They all have various parameters to be looked upon.”
For an investor who has the luxury of time and also would like to make a slightly higher return, Mutual Funds are handy.
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“In an FD, if you lock in your money at a high-interest rate, you are lucky because when the interest rate goes south, you miss out on high returns. Whereas in the mutual fund, if you lock in at high interest rates and you stay put and the interest rate goes down, you actually benefit from it because, in the fixed-income products there is a way to capture the softening interest rates because your existing yields will get appreciated”.
Adhil Shetty, CEO of BankBazaar.com, says mutual funds are long-term investments that offer comparatively higher returns than fixed deposits.
They also carry a higher degree of risk.
“Fixed deposits are a low-risk saving option which can lend stability to your portfolio with stable returns. They are ideal for investors who may be approaching retirement and looking for capital preservation and a fixed income.”
“The returns offered by fixed deposits, though stable, may not be adequate for meeting financial goals. Mutual funds, on the other hand, have the potential to provide inflation-beating returns that can help you meet your goals,” Shetty added.
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Another factor to consider when comparing between these two instruments is taxation. Mutual funds are taxed only at the time of redemption or sale in case they have a profit and not during the accrual of returns. In contrast, FDsare taxed as per the applicable tax slab, even when they are accruing interest.
Fixed deposit returns are fairly predictable and can be calculated easily. For instance, a 5-year FD might offer around 5-8% interest annually, providing a steady income stream. In contrast, mutual fund returns, though higher than FD returns, can vary based on market conditions and are uncertain.
“Before choosing any investment, it is crucial that you consider your risk appetite, investment horizon, and financial goals. If you seek stability and are risk-averse, go for fixed deposits. But if you’re aiming for long-term growth and can stomach market volatility, mutual funds may be ideal for you. You can also speak to a financial advisor who can help you build an investment strategy that is tailored to your financial situation,” says Shetty.
While FDs are very popular, fixed-income mutual funds are also getting popular. It presents a very wide scope of fixed-income products between risk and reward and even duration. So, the benefit of a mutual fund is that it gives you more options, more flexibility, and a wider scope of participating in the various fixed-income products available in the market, not only FDs.
“For an investor who is not necessarily looking at only bank deposits alone, there is a very good opportunity in mutual funds to be considered as a part of the fixed deposit income allocation for people to invest,” says Joseph.
The risks, he says, are not the same, and the liquidity profile is slightly different, but there are advantages where you don’t have to worry about locking in for a certain period to get a certain return, you don’t have to worry about all your money being in just one investment because mutual funds will make investments into multiple bonds and multiple deposits on your behalf.
