When time comes to invest your hard-earned money, there are abundant options available in the market. Two popular investment options that have been preferred by investors for years are Fixed Deposits (FDs) and Mutual Funds. As you know both options have their unique features and benefits, they serve different investment goals, risk tolerance, and timeframes.
In this article, we’ll explore a comprehensive comparison of FDs and Mutual Funds, highlighting the advantages of mutual funds over FDs.
Benefits of Mutual Funds over FDs
1. Potential for Higher Returns: Mutual funds offer the potential for higher returns over the long term, making them a great option for investors looking to grow their wealth. In contrast, FDs offer fixed returns that may not keep pace with inflation.
2. Diversification: Mutual funds provide diversification, reducing risk by investing in a mix of assets. FDs, on the other hand, are invested in a single asset class, making them more vulnerable to market fluctuations.
3. Tax Benefits: Some mutual funds, like ELSS having lock-in period of three years offer tax benefits, helping you save on taxes. Tax saving FDs, however have lock-in period of 5 years, the returns earned on ELSS after three years attracts capital gain tax at the rate of 12.5% whereas FDs returns are taxable as per the tax applicable to the slab your income falls.
4. Flexibility: Mutual funds offer flexibility in terms of investment amount, tenure, and withdrawal options. FDs, on the other hand, require you to keep your money locked in for a specified period.
5. Professional Management: Mutual funds are managed by experienced professionals who actively monitor the market. FDs, however, are managed by banks, which may not have the same level of expertise.
Fixed Deposits (FDs): A Low-Risk Investment Option
Fixed Deposits are a type of savings account offered by banks and financial institutions. They provide a fixed interest rate for a specified period, usually ranging from a few months to several years.
Drawbacks of FDs:
1. Returns may not beat inflation: FD interest rates might not keep pace with inflation, reducing purchasing power.
2. Taxable: FD interest is taxable at the rate of applicable to slab in which income falls, whereas mutual funds returns are taxable, long term capital gains at the rate of 12.5% and short term at the rate of 20% that will reduce the actual returns for higher income groups.
3. Low returns: FD interest rates are generally lower than those offered by other investment options.
4. Inflexibility: FDs require you to keep your money locked in for a specified period.
Conclusion
While FDs offer fixed returns and low risk, mutual funds offer the potential for higher returns, diversification, and tax benefits. For long-term investors, mutual funds are a better option due to their potential for growth, compounding, and diversification.
As a mutual fund broker, we’re committed to helping you achieve your investment goals. Contact us today to learn more about mutual funds and how to invest in them!!