Fixed deposits (FDs) have been a traditional investment option when it comes to saving money. The reason being they are one of the safest and oldest investment avenues offered to individuals.

But the question now is whether FDs are still the best investment option available to investors? Or do we need to upgrade our options with time? Can mutual funds help us achieve our goals in a more efficient way?

Read on to get a better insight on where to invest your money.

What is a mutual fund?

A mutual fund is an investment vehicle wherein an Asset Management Company or AMC pools the money of various investors. This pooled investment is managed by a fund manager who further invests the money in various securities such as stocks, bonds, money market instruments, etc. These fund managers are market experts with in-depth knowledge about the complexities of the financial instruments and the mutual funds’ industry.

What is a fixed deposit (FD)?

A fixed deposit, or an FD, is a financial instrument offered by banks or NBFCs (Non-Banking Financial Company) that provides investors a higher rate of interest than traditional savings’ accounts. Since investors are promised a fixed rate of return, which are set by the banking regulator Reserve Bank of India (RBI), FDs are a safer investment option. In return, the investor agrees not to exit or withdraw the funds for a given period.

The shift from Conventional FDs to Mutual Fund schemes

There was a time all surplus cash, be it an increment or a bonus, went on to become an FD. Our grandparents and perhaps even our parents have all ended up investing in an FD at least once in their lifetime. Granted, it was the best option to gain interest while ensuring capital protection. So, what changed?

Over the past few years, mutual funds have built their presence as a long-term investment vehicle

Furthermore, FD rates were cut after the demonetisation drive of 2016 in lieu of the huge deposits the banking system was experiencing and the mutual funds industry cashed in on the situation. Also, Equity-Linked Savings Schemes (ELSS), a type of mutual fund that aids in tax-saving with a shorter lock-in period of three years, helped the MF industry rise to prominence.

Fixed deposits vs. mutual funds

If you are still confused which investment vehicle to choose, the following comparison of FD vs MF could help you reach a decision.

Which is better: FD or Mutual Fund?

The decision to invest in mutual funds or FD solely lies with the investor. An investor should check his financial goals, risk appetite, and investment horizon before taking a decision. Investing in an FD requires a lumpsum amount, whereas you can invest in mutual funds with an amount as low as Rs500.. Happy investing!

Frequently Asked Questions (FAQs) on Mutual funds & Fixed Deposits

1. Is a mutual fund better than a fixed deposit?

It depends on your financial goals and risk appetite. If you are looking for an investment with low-risk exposure, fixed deposits would be the safer bet for you. However, if you are looking for reasonable returns alongwith high risk, you should consider investing in mutual funds.

2. Do we get interest on mutual funds?

Since mutual funds are not deposits, they do not pay any interest. However, you get returns on mutual funds based on the scheme’s performance in the market.

3. Is it a good idea to invest in mutual funds?

Yes, if you are seeking a long-term investment that offers market-linked returns, mutual funds are the better pick for you.

Disclaimer : The comparision of mutual funds vs fixed deposits is shown for illustration and understanding purposes only. Invetsments in mutual funds are risky and relatively carry higher risk.

The information given here is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme