The FD Versus Mutual Fund Debate

As interest rates on fixed deposits are crumbling low, investors are faced with a dilemma. To go for a fixed deposit or not? Or should I invest in mutual funds? This is one of the major muddles that investors get into. This article, we explore if it is good option to go for mutual funds and transfer investment portfolios from fixed deposits to mutual funds.

What is a better investment?

Post demonetization, most banks in India are not offering attractive rates of interest on fixed deposits. The average highest rate of return is around 7% on fixed deposits. However, when it comes to mutual funds the rate of return is comparatively much higher. When it comes to mutual funds, your money is put into the most lucrative stock in the market. Though they pay at a very good rate, it comes with a high-risk factor because they depend on the stock market. Since stock markets are highly volatile by nature, there is no guarantee on returns. There is a risk of losing money if the stock does not perform well and vice versa.

However, there are many advantages of investing in mutual funds. Let us take a look at some of them:

● Mutual funds pay a much higher rate of interest  when compared to fixed deposits

● It is a much wiser investment option because you can earn more in a shorter time span

● Certain mutual fund schemes offer an average interest rate of a whopping 16.7%. The range of interest paid is between 8.5 to 16.7%.

● The rate of return on mutual funds will beat inflation. On the other hand, fixed deposits will not help counter the effects of inflation

● If you hold a mutual fund for 12 years or more, you can gain tax benefits

● One can draw money from mutual fund accounts at anytime

On the other hand, fixed deposits too are a wise investment option. This helps investors put away a certain sum of money for future use. There is no risk involved in this type of investment and thus it is one among the wisest investment options for those who do not want to take financial risks.

Let us understand the advantages of fixed deposits:

● A much safer investment option when compared to mutual funds. There is no risk of losing money if you invest in well-known and reputed banks

● Fixed rate of return is guaranteed and there are fewer fluctuations that affect this financial product like how stock markets fluctuate and determine how well mutual funds do

● Good long-term investment because a longer tenure will usually pay a higher rate of interest

On the whole, one can say that fixed deposits are for those who want to take a lesser financial risk, while mutual funds are for the more financially adventurous. Mutual funds are a good option for short-term financial investments and also, it is important not to park all your money in mutual funds. It is wiser to invest a certain percentage on fixed deposits and a certain percentage on mutual funds. This way, one can reap both the benefits.