Fd Vs Mutual Fund: Key Differences Between Mutual Fund & Fixed Deposit

Here’s a fact! Investing is key to building wealth. From mutual fund (MF) schemes to fixed deposits (FDs), each one allows you to grow your savings but comes with its own set of pros and cons.

In this article, we look at mutual funds vs fixed deposits and which should you invest in.

What are mutual funds?

Mutual funds are investment instruments that pool money from multiple investors and invest it across different asset classes to create a diversified portfolio. These funds invest in stocks, bonds, money market instruments, and other securities and come in different types like thematic funds, sectoral funds, tax-saving funds, etc.

Mutual funds are managed by a professional fund manager who makes investment decisions based on the fund’s objectives and market movements. Since these funds invest across a wide range of assets, they help spread the risk, making it an excellent investment option for risk-averse investors. Moreover, investing in mutual funds is affordable as you can invest as low as RS. 500 per month.

What are fixed deposits?

Fixed deposits are financial instruments offered by financial institutions that allow you to deposit a lump sum amount for a fixed tenure at a predefined interest rate. FDs typically range from 7 days to 10 years and are considered safe investments since they are not affected by market volatility.

Fixed deposits are ideal for investors seeking guaranteed and stable returns without any risk. Moreover, tax-saver FDs allow you to lower your tax obligations by investing in an FD for 5 years.

How do MFs work?

MF schemes pool capital from multiple investors. This corpus is invested in various financial securities, including bonds, stocks, debt securities, money market instruments, and other assets – depending on your MF’s mandate.

This investment vehicle is well-suited for you if you don’t have the time to regularly oversee your investments. Here, a qualified fund manager takes care of your investment decisions, allocates the assets under management (AUM), and decides the entry/exit time.

Benefits of investing in MF schemes

A significant advantage of investing in MF schemes is professional management. Since your fund manager picks the best securities for making investments, you get to build a portfolio packed with high-growth stocks, bonds, government securities, etc.

Besides that, you can start your investment through a systematic investment plan (SIP) with small initial investments as low as Rs. 100. You also enjoy liquidity with mutual funds as you can conveniently exit a scheme and redeem your unit holdings.

With MF schemes, you can easily park funds in a broad spectrum of asset classes. Whether you are risk-averse or an aggressive investor, you’ll find a product suited to your time horizon, investment objective, risk profile, income, etc.

Additional Read: Mutual Funds vs Stocks: Which is Better?

How do FDs work?

You can lock away a lump sum amount in a fixed deposit for a predetermined tenure. Here, the amount you deposit earns a fixed interest. Besides, since the interest is fixed, you know exactly how much your money will grow within the period and enjoy the highest assurance of earning decent, consistent returns.

#1 Types of FDs

- Cumulative FD

- Non-cumulative FD

When your savings earn interest in cumulative deposits, the interest income is added to the principal sum deposited and is reinvested. This means you enjoy accrual interest growth. Now when your FD matures, you collect your invested principal amount and the earned interest.

Whereas, when you invest in non-cumulative deposits, the earned interest is disbursed at periodic intervals- quarterly, annually, or monthly.

#2 Benefits of investing in an FD

If you are like most risk-averse investors, you want to collect high returns on your investments without the potential risk of losing your hard-earned money to market fluctuations. An FD provides you with just that! As one of the safest investment avenues, you can easily park excess funds and multiply your savings steadily with fixed deposits.

But that’s not it! You’ll accrue assured returns on your investment regardless of how the market behaves.

Additional Read: Mutual Fund Fact Sheet: Key Information It Holds

Key differences between fixed deposit (FD) and mutual fund

FD vs mutual fund: Which is better?

The choice between an FD or mutual fund depends on your preferences, financial goals, and risk appetite. If you're seeking predictable and steady returns without any market risk, a fixed deposit can be the best choice. Certain tax-saving fixed deposits also help you lower your tax liabilities.

However, if you're willing to take some risk for potentially higher returns, consider investing in mutual funds. They are managed by professional fund managers and help you spread out the risk by investing in a diversified portfolio of stocks and other securities. However, it's important to assess your risk tolerance and financial goals and carefully review the fund's objectives and past performance to make an informed decision.

Frequently asked questions

1. Which is better: FD or SIP?

The best choice between an FD or SIP depends on your investment goals and risk tolerance. Fixed deposits offer guaranteed returns and are safer, making them suitable for risk-averse investors. On the other hand, SIPs are subject to market risks but have the potential for higher returns.

2. What is a better option than FD?

For higher returns than FDs, you can consider investing in mutual funds. However, they often come with market risks. So, it's important to research thoroughly to make an informed decision.

3. Which mutual fund gives a 12% return?

No mutual fund offers a fixed 12% return as they are linked to the market. It's important to check a mutual fund's past performance and consult with a financial advisor to choose funds aligned with your goals.