There are a variety of investment instruments available in the market.
FDs and mutual funds are two of the most popular financial instruments considered for investment. Both of them have their own set of benefits and risks.
Depending on your risk appetite, the expectation of returns, current financial capacity, and other factors, it is best to choose one accordingly.
Fixed deposits are a traditional choice of investment for many.
According to the RBI research that was released in June 2020, nearly 53% of the average household financial assets are invested in fixed deposits. Moreover, there has also been an increase in the number of fixed deposit accounts. One of the main reasons why many individuals choose fixed deposits is that it is backed by the government and has negligible risk compared to other options in the market. On the other hand, mutual funds offer a diverse portfolio and have the capacity to offer higher returns in comparison.
Related: Financial Analysis and Reporting: Why Are They Important?
Typically, fixed deposits have a fixed interest rate. One main cause of concern for senior citizens who primarily invest in FD is the declining rate of interest. Over the last 25 years, there has been a decrease in the interest rate observed. One of the reasons that have accelerated this decrease in interest rates has been the pandemic. Moreover, this decrease contributed negligibly to overcome the increasing prices due to inflation. However, a distinguishing aspect of FD from mutual funds is that it offers guaranteed returns irrespective of how the stock market is performing.
When it comes to mutual funds, there is a higher potential to gather higher returns. In addition, it is also possible to invest in mutual funds with much lesser investment. Different types of mutual funds provide different rates of return. For instance, equity-based mutual funds usually provide higher returns in comparison.
Each of these financial instruments has its own set of benefits. Let us have a look at the benefits of both mutual funds and fixed deposits.
1. Benefits of Mutual Funds
Mutual funds have multiple benefits such as the following.
- The risks that come along with investing in the stock market such as equity are reduced. This is primarily because of the diversification that happens with mutual funds.
- The minimum investment required is much lower compared to other investment options available.
- The returns offered are typically high, especially from equity-based mutual funds.
- The funds are managed by professionals who are financial experts.
- The surplus amount is easily allocated to the existing portfolio with the help of top-ups.
- Another key benefit is that there are various modes of investments such as lump sum plan, systematic transfer plan, and the systematic investment plan.
2. Benefits of FD
When it comes to fixed deposits, there are certain key benefits too. Here are some of these benefits.
- Fixed deposits are backed by the government and hence come with almost zero risks.
- A guaranteed rate of return is provided by fixed deposits.
- According to Section 80C of the Income Tax Act, you are entitled to tax deductions amounting up to Rs. 1.5 Lakhs for a fixed deposit that is over 5 years in tenure.
- The interest earned by senior citizens on fixed deposits of up to Rs. 50,000 are exempt from tax as per Section 80C of the Income Tax Act.
Both FD and mutual funds are popular choices of investment. Each of them has its own benefits and may suit different individuals. So, it is important to first assess your financial goals, assess your current financial capacity, and further evaluate your expectations of returns before investing in either of them. For instance, if you have a low-risk appetite and would like to have fixed returns, a fixed deposit might be a better option. On the other hand, if you would like to gain more returns, mutual funds may suit you better. Analyzing these aspects can help you make an informed decision regarding your investment.