Mutual Funds vs Fixed Deposits: which one to choose?
How does Mutual Funds compare to Fixed Deposits in terms of returns over a period of time, keeping in mind various factors like market volatility, risk, gains, etc.
When it comes to saving money, people often opt for fixed deposits, considering them to be relatively risk-free. The security of having the money in the bank is apparently a great factor. But we need to introspect that is this actually saving of money or rather losing of it?
Fixed Deposits FD vs Equity Investing
⇒ Fixed deposits of FDs may give attractive returns on paper, but with the tax payable at the current tax slab, the more one invests in FDs, the more tax one has to pay. Taking in consideration the rate of inflation over the years, it is possible that one may actually be facing a loss by investing in FDs.
⇒ When it comes to rate of returns, FD rates are pre-specified and do not change for the entire tenure.
⇒ In terms of risk, FDs are generally known for minimal risk.
⇒ FDs have a fixed time period as the name suggests, and generally have low liquidity till the tenure of the deposit ends.
⇒ In case of premature withdrawals, FD holders have to pay a penalty, and miss out on a portion of the expected returns.
⇒ When it comes to FDs, tax levied depends on your current tax slab, irrespective of the tenure of the fixed deposit.
Mutual Funds equity Investing
⇒ In the case of Mutual Funds or MFs, the scenario is a wee bit different.. Although MFs are affected by market volatility and do have a level of risk, they are managed by professional fund managers, who do their best not only to protect investments but also to grow it.
⇒ On the other hand MF rates are affected by market conditions, hence during positive market conditions; MFs have the potential to earn high returns where as FD rates are unaffected.
⇒ where as equity mutual funds carry high market risk, and debt mutual funds carry lower market risk than equity. But risks can be mitigated to a certain extent as MFs are managed by professionals. Yet, MFS are prone to market risk. But as it is said, big risks give big returns.
⇒ In case of MFs, most of them offer high liquidity on the condition that the minimum holding period has passed and subject to lock-in period as applicable.
⇒ MFs only charge an exit load if investments are withdrawn, in a very short period, normally under a year. Some MF Schemes offer high liquidity. Funds can be withdrawn at any given point of time, without any exit load or extra charges.
⇒ Equity funds held for long term (more than a year) are not taxable. Short term equity funds are taxable at 15%. Long term debt fund gains are taxable at 20% with indexation and 10% without indexation and short term capital gains are taxable according to investor’s tax slab.
Fixed Deposits VS. Mutual Funds Quick View
an investment for Capital Protection
☺ Fixed Returns
FDs generate fixed returns
based on type of FD and period of holding.
☺ Risk Free
FDs don't carry
risk and period of holding.
☹ Don't Beat Inflation
FDs are not Inflation
☹ Normal Returns
you get only 7-8% p.a.
Pre tax returns
☹ Interest Texable
Interest erend on FD is fully taxable
as per Income tax slab rates
an investment to Grow your Money
☺ No Fixed Returns
Viriable returns baned on market fluctuations and type of Mutual Fund
☺ Risk Investment
Mutual Fund are
Subject to Market Risk
☹ Can Beat Inflation
MFs can easily beat Inflation
in the long run
☹ High Returns
you get explore higher returns by
investing in MFs for longer period
☹ STCG / LTCG
STCG / LTCG taxable based on period on holding
LTCG on Equity Funds : Tax Free
In the end, the decision to invest between a FD and a MF is based on the risk capacity, and the horizon of the individual. But when the things are hopeful, and there are good prospects for growth of the economy, it makes greater sense to invest in MF, because of the possibility of returns.
Which is more Profitable?
Equity v/s Fixed Deposit
Which is more Profitable? Equity v/s Fixed Deposit
Detailed Analysis of both these (Equity v/s Fixed Deposit) Investment Instruments
There is a myth that common people cannot make money in the stock market due to its uncertainties. The fact is that an ordinary person enters the stock market with being either too pessimistic or too optimistic and both these attitudes are not advisable. Taking the medium path of patience will give better returns in the stock market, even if you are not a financial expert. Due to the exaggerated misconceptions about shares, most people invest their hard earned money in fixed deposits which is widely accepted as the safer form of investment. But do you know that stocks perform better and provide you more returns than fixed deposits? Here is a detailed analysis of both these investment instruments.
Facts about Fixed Deposits
It is an investment option that allows you to invest a specific sum for a fixed period at a pre-determined interest rate. It is one of the popular option for the common man owing to its low risk factors and generation of regular income.
An FD usually provides you only lower returns about 8% - 9% which is less profitable than other options of investment. It also takes a long time to see your money grow.
The Effect of Inflation
Even though it may appear free of risk, the inflation could negate your interest return through fixed deposit . Therefore, the actual return could be zero or negative.
It is taxable
Although there are certain tax benefits, the interest you earn from a fixed deposit is taxable.
Premature With drawl from the FD will cost you reduction in interest rates, also incur pre-closure charges as well.
Benefits of stocks
An experienced investor in the stock market knows that if certain rules and strategies are followed then benefits can be reaped from stocks.
You can withdraw your money from the stock market investment&nnbsp;anytime according to the need of the customer.
Tax free Dividend
The Dividend obtained from the company is tax free.
The stock market gives you the freedom to buy during low times and sell during high times. History has proved that the return on stock market investments has beaten the inflation.
Better Investment Better Return
Better Investment Better Return
Investment in equity market can give you better returns than any of the other asset classes.
FDs are always hailed for their low risk category while risk is involved in stock markets. But a bigger fortune can be made if you play your dice well in the stock market. To take an investment decision, it is always better to take a valuable advice from experts, so that you need not regret in future.
If you have any queries related to investment in stock market, our experts at catalyst-investing will be happy to clear your doubts and aid you in remunerative investments.
Mutual Funds vs. Fixed Deposits
Time in market is more important than Timing the Market
|Parameters||Mutual Funds||Fixed Deposits|
|Rate of Returns||No Assured Returns||Fixed Returns|
|Inflation Adjusted Returns||Potential for High Inflation-adjusted Returns||Usually Low Inflation-adjusted Returns|
|Risk||Medium to High Risk||Low Risk|
|Liquidity||Liquid||Medium to Low Liquidity|
|Premature Withdrawal||Allowed with Exit Load||Allowed with Penalty|
|Cost of Investment||Management Cost||No Cost|
|Tax Status#||Favourable Tax Status||As Per Tax Slab|
The illustration here can help you
understand the comparison better...
Fixed Deposit vs Mutual Fund
|Fixed Deposits||Debt Mutual Fund||Equity Mutual Fund|
|Return (% p.a.)||9.0%||9.0%||9.0%|
|Holding Period||1 Year||1 Year||1 Year|
|Indexed Investment Amount||-||107,500||-|
|Tax Paid (as applicable)||2,700||300||-|
|Post Tax Returns||6,300||8,700||9,000|
|Post Tax Returns (%)||6.3%||8.7%||9.0%|