Mutual fund vs Fixed deposit – Where should you Invest?

November 20, 2022

Mutual funds vs fixed deposit can be a great topic to debate. Our Elders still believe that a fixed deposit is the best way to invest money.

According to their financial knowledge, they are right somewhere, but if you have a higher risk capability, you can look for a mutual fund.

As you have looked for this article, somewhere, you want to know about the difference and similarities between mutual fund vs fixed deposit.

I will cover all of those in this article, and we will also see where you should invest your money between mutual fund vs fixed deposit.

To understand mutual fund vs fixed deposit.

first, let’s understand their basic definition.

What is Mutual Fund?

A mutual fund is a basket of investments where you invest your money, which is further distributed in different instruments. Every mutual fund has its objective for which they invest. The mutual fund invests in debt or equity instruments or a combination of both.

There are also other types of mutual funds; you can read about them in detail here. Profession managers manage these funds.

What is Fixed Deposit?

In Fixed deposits, We invest some money which is a one-time or lump-sum, in a bank or any NBFC company. This investment is for a fixed period. This time can be for a few days to many years.

The risk is negligible. You can earn up to 4-5% annually on your investment.

Similarities: Mutual Fund vs Fixed Deposit

Investment: they both are investment options for investors on which one can invest.

Return: Whenever we invest our money, we expect some return.

Tenures: As an investor, we can choose out period or the maturity period on which we will get our principal money back.

Differences: Mutual Fund vs Fixed Deposit

We all invest our hard-earned money in both options, but they are different.
We all hear that fixed deposit is safe and mutual fund is risky. Let’s see how they differ and why they carry a different risks.

	Fixed Deposit 📝	Mutual Fund 📈
Risk	No Risk	The risk depends on the market
Return	Fixed Rate of Return, Generally 4-5% per annum.	Not fixed, But if you stay invested for long-term, you can expect a return of 14-18%.
How much will I get?	A predetermined amount is guaranteed before you invest your money.	It depends on the market’s performance. If you want to get good returns, you must invest for a long time.
Liquidity	Low Liquidity, If you want to withdraw before the maturity date, you must pay the penalty.	High Liquidity, You can withdraw wherever you want but not in some cases, such as ELSS and closed-ended schemes.
Inflation	There is no effect of inflation on your returns. Whatever the percentage of inflation, you will get a fixed return.	Since it depends on the market, adjustments are made according to inflation.
Taxation	If the interest you earn is more than Rs. 10,000 per annum, then you have to pay TDS.	Whatever profit you get, you have to pay tax on your capital gains. Some mutual fund schemes also offer tax redemption.
Invest	It is a debt-investing where you will get your principal amount back along with interest after maturity.	It is debt and equity investing, as your money will be invested in either or both of them.
Diversification	Diversification	provides diversification by investing in various instruments
Cost Involved	You don’t have to pay any cost to invest and claim the money in Fixed Deposit.	An expense cost is involved when you redeem your mutual fund units.
Dividend	No	Depends on the Mutual fund Scheme
Surveillance	RBI (Reserve Bank of India)	SEBI (Securities Exchange Board of India) & AMFI (Association of Mutual Funds of India)

Questions on Mutual Fund vs Fixed Deposit

Before investing in any of these instruments, you must ask some basic questions.

What is my risk capability?
How small an amount can I invest?
For how long will I stay invested?
What is my aim for investing?
How much do i need to pay after earning on my investment?

Expectations from Fixed Deposit;

Risk is the main thing that differentiates both investing options, so if you don’t like risk Fixed deposit can be a great option for you where you will get a fixed rate of return.
If you want a loan, you can also use your fixed deposit as security against the loan.
To start an FD, you must go to your bank’s home branch and ask for all processes. Nowadays, you can also start FD online with banks and NBFCs.
The fixed deposit doesn’t fluctuate daily. Therefore there is no need to track your FD. You need to remember the maturity date so you can claim your principal amount and interest.
You can stay invested in FD for as little as seven days up to a maximum of 10 years.

Expectations from Mutual Fund:

Risk is higher than the fixed deposit, but you can decide which mutual fund you want to invest in per your risk capability.
When you invest your money in a mutual fund scheme, your money is further invested in debt or equity instruments or a combination of both.
A mutual fund is managed by a professional fund manager who finds, selects, and analyses a particular stock in which the company will invest.
You hold the units of mutual fund schemes with a specific price called NAV.
You can choose your mutual fund scheme as per their objective. By reading the objective of mutual fund schemes, you will also know whether you should invest long-term or short-term.
You can invest in two one is Lum Sum or One Time investment and another way is to invest through SIP.

Which is better: Mutual Fund vs Fixed Deposit

When investing in mutual fund vs fixed deposit, you need to ask some important questions to yourself.

It varies from person to person, as we have different goals, risk capability.

What is my Goal?

Not just investing in mutual fund or fixed deposit, but before making any investment, you need to set your goal. These are examples:

I am investing for return on Investment.
I have extra money, and I can invest that money for some decent return.
I want to invest my money but will not take any risk.
I can take the risk, but I want great returns on my Investment.

After deciding the goal, you can select which option you want.

What is my risk?

In the above table, the difference between mutual fund vs fixed deposit also differs their risk factor where one is risky, and another is not. So if you don’t like risk better to invest in a fixed deposit; risk is also inversely proportional to age. When you are young, you can take risks, but you try to avoid risks when your age grows.

What is my investing duration?

You need to decide your investing period and how long you will be invested in the mutual fund or fixed deposit.

Final Words on Mutual Fund vs Fixed Deposit

If you invest for a long, then you can earn a good return on your investment. Mutual fund offers you diversification by investing in different types of instruments. Wherever you see volatility in the market, you can look for Fixed Deposit as it hasn’t any effect of market.

I hope you can differentiate between mutual fund vs fixed deposit.

Now you can comfortably decide where to invest.

Be specific with your goals and risk capability to invest and sleep well.

Wherever you invest in mutual fund vs fixed deposit, it is important to know all the details of the investing.

Where are you going to invest?

Mutual Fund vs Fixed Deposit.

Till Then

Happy Investing

Rupay Rajat

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