Fixed deposits (FDs) have always been a safe bet for investors with a low-risk appetite. Mutual funds (MFs) in comparison though could offer higher returns but are risky investment options. FDs are usually compared with debt funds, which as compared to equity funds are not as volatile and fall in the low to medium risk category.
The early months of 2015 witnessed a reduced policy rate by 175 basis points (bps) by the Reserve Bank of India. As a result of this policy rate, the interest rate on FDs too got reduced marginally. Despite the fall in the interest rates, most low-risk investors still prefer FDs over debt funds, for the fact that the FDs assure a fixed return.
Here is a comparison made between mutual funds and fixed deposits.
Want assured returns? Go for FDs
FDs promise a fixed return based on the rate of interest offered at the time of subscription. The returns are usually higher than a savings account, yet they vary depending on the investment tenure. However, interest rates promised at the time of investment are guaranteed and cannot be altered or changed.
Some financial institutions offer returns on FDs as high as 8%. Bajaj Finance Fixed Deposit is one good option that offers an annual return of 7.85%, which can be increased up to 8.2% for tenures between 12 and 60 months.
In comparison, MFs offer no constant or uniform gains and are subject to market activities and movement.
FDs are a good option during emergencies
Emergencies can arise at any point in life, which may demand you to look for your savings. Both MFs and FDs allow you to withdraw money prematurely, after paying an exit load or a penalty. The latter though allow you to instead go for a loan against your FDs, which could be cheaper than other loans in the market. Some banks offer up to 90% of the principal as loan amount. But investing in mutual funds doesn’t have such advantage of supporting during liability crunches.
Tax liabilities: MFs may have a slight edge
When it comes to investments anything less than three years, tax liabilities are the same for both MFs and FDs. However, withdrawal of gains in MFs, attract much less tax as compared to tax on interest gained from FDs. This is for the fact that MF returns are considered capital gains and interest earned on deposits is considered income.
If the interest earned through an FD account exceeds Rs 10,000 in a financial year, financial institutions may deduct tax at source at 10%, unless the investor makes a submission through Form 15G that he/she does not have any taxable income.
Zero investment costs on FDs
Fixed deposits come with a zero-investment cost. In comparison, mutual funds may have – depending on the scheme of investment – an entry load and an exit load, besides other annual expenses, which could range from 0.50% per annum to 2.25% per annum for debt funds and up to 3% for equity funds.
The choice between mutual funds and fixed deposits ultimately depends on the investor’s risk appetite. If you have a low-risk appetite and are looking for an assured return at the time of maturity, fixed deposits are the best option for you.
Source : Fixed deposits vs Mutual Funds