Fixed Deposits Vs Mutual Funds : Which one is better to invest?

Fixed Deposits Vs Mutual Funds

There was a time when any excess money in terms of bonus, salary increment, lottery etc. used to get invested in fixed deposit, without giving much consideration. And this was the best piece of advice, you might have received from your parents or grandparents and felt as proud son.

But in today’s cut throat world, you might need to think twice before putting all your eggs into basket of fixed deposit. As in the long run, you might lose the benefits, which you get from investing in mutual funds.

Let’s quickly go through some comparison between fixed deposits and mutual funds, before you take an important investment decision.

Purpose:

Fixed Deposit – To protect the capital.
Mutual Funds – To grow your capital.

Safety of Returns:

Fixed Deposit – Fixed returns based on type of FD’s selected and period of holding.
Mutual Funds – Variable returns based on market fluctuations and type of mutual fund selected.

Risk:

Fixed Deposit – Risk free investment.
Mutual Funds – Subject to market risk.

Inflation War:

Fixed Deposit – Does not have the potential to beat inflation
Mutual Funds – Have the potential to beat inflation in the long run

Return on capital:

Fixed Deposit – Normally 7% to 8% p.a before tax.
Mutual Funds – Normally range higher than 10% in long run.

Taxability on Returns:

Fixed Deposit – Interest earned is fully taxable as per income tax slab rates
Mutual Funds – Short term/long term capital gain taxable based on period of holding. Long term capital gain on equity funds tax free.

Dividend:

Fixed Deposit – No option under FD
Mutual Funds – Under mutual funds, dividend option is available.

Early Withdrawal:

Fixed Deposit – Penalty is levied to withdraw prematurely
Mutual Funds – Penalty depends on type of fund selected.

Management Cost:

Fixed Deposit – No running/management cost
Mutual Funds – Expense ratio of 2.5% is charged as management cost.

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Author: AK

Ankit is a part-time blogger with full-time employment in an investment bank. He is a CA with interest in personal finance topics.

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