Better Than Fixed Deposits: Better Than Fixed Deposits: Know All About Why are Mutual Funds Better Than Fixed Deposits (2024)

FAQs

Better Than Fixed Deposits: Better Than Fixed Deposits: Know All About Why are Mutual Funds Better Than Fixed Deposits? ›

However, mutual funds can be a better alternative. Not only do they have better return-generating capabilities, their taxation is also more favourable. You don't have to pay tax on mutual funds while your returns are accumulating. You pay tax only when you redeem or sell your mutual fund units at a profit.

While FDs are considered a safe and secure investment option, yielding low to moderate returns, mutual funds offer the potential for higher returns with greater risk. Mutual funds are professionally managed investment portfolios that pool money from multiple investors with similar financial goals.

Reasons for investing in Fixed Deposits

It is risk-free and guarantees fixed returns. Fixed deposit interest rates are higher than other risk-free investment instruments like Treasury Bills or Government Bonds. Fixed deposits provide complete flexibility with regard to the tenure of investment.

Advisor Insight

A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.

Remember: While both investment options have similarities, you must be aware of what makes them different and unique. Term deposits are more predictable but offer lower returns, while mutual funds provide potential for higher return but come with market risk that could possibly result in negative returns.

Low Cost — An important advantage of mutual funds is their low cost. Due to huge economies of scale, mutual funds schemes have a low expense ratio. Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund's daily net assets.

Higher Returns Than FDs: Mutual funds (especially equity funds) can provide better returns than FDs over the long term. Professional Management: Fund managers actively manage the portfolios of mutual funds. They readjust it to the changing market conditions.

The advantages of Fixed Deposits (FDs) are as follows:

Predictable income. A low-risk investment option. Flexibility of investment amount and tenure. Easy to understand.

High-interest rates aren't Always Guaranteed

Fixed deposit rates are not guaranteed, so there's no guarantee that your interest rate will remain high for the duration of your investment.

The main advantage of a fixed-rate loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. Fixed-rate mortgages are also easy to understand.

Why did you choose mutual funds? ›

Mutual funds invest in two main asset classes -- debt and equity. Some funds are pure debt, and some invest in just equity; others are balanced or hybrid. The primary benefit of investing in a mutual fund is that you get exposure to a variety of shares or fixed income instruments.

Mutual funds offer diversification or access to a wider variety of investments than an individual investor could afford to buy. Investing with a group offers economies of scale, decreasing your costs. Monthly contributions help your assets grow. Funds are more liquid because they tend to be less volatile.

Mutual funds are a great way to invest for individuals who can do with professional help in the management of funds in varied asset classes or sectors. But, this is not to say that seasoned investors should not or don't invest in mutual funds.

Not only do they have better return-generating capabilities, their taxation is also more favourable. You don't have to pay tax on mutual funds while your returns are accumulating. You pay tax only when you redeem or sell your mutual fund units at a profit. That's not so with FDs.

While term deposits may seem like a safe option, bond funds can offer greater liquidity, diversification, and potential for capital appreciation. Volatile markets and rising interest rates have led to major asset allocation shifts over the past year.

Corporate Fixed Deposit schemes offer higher returns on your investment, but choosing the right company is imperative. If you choose a good Company FD scheme, you will generally earn more on your investment than bank FDs as these schemes offer the highest interest rate on FD.

Yes, many make money for retirement and other savings goals through capital gains distributions, dividends, and interest income. As securities in the mutual fund's portfolio increase in value, the value of the fund's shares typically rises, leading to capital gains.

For example, the risk in an RD could be low yields and the tax risk. Bank RDs have very little risk of default. However, in the case of mutual fund SIPs there can be a plethora of risks like interest rate risk, default risk, volatility risk, business risk, market risk etc.

Mutual funds may be an appropriate retirement investment because they offer professional management and diversification. They are not FDIC insured and involve investment risks, including possible loss of principal and fluctuation in value.