Nifty99000 100%

Sensex99000 100%

Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
RSS

News

FD vs Mutual Funds: The Better Pick?

Author: Team Finapolis/Saturday, March 24, 2018/Categories: Fixed Deposits, Mutual Funds

FD vs Mutual Funds: The Better Pick?

Fixed deposits are considered a traditional investment instrument as compared to mutual funds, which has entered the market more recently in comparison. Fixed deposits have been used by individuals as an alternative to savings accounts as it offers better returns.

Whether mutual funds are better than fixed deposits has been an age old debate. Here are few points in the debate on FD vs mutual funds that highlight the difference between the two and help you take a decision:

Rate of returns

Fixed deposits have pre-specified rate of returns. This rate also remains fixed for the entire tenure of the fund. On mutual funds, however, the rate depends upon the market movement. It offers you the benefit of market-linked returns. FDs, on the other hand, offer the same rate even if the markets turn negative or positive. While this in an advantage when the markets are low, it also means that you will miss out on making good profits when it is performing well. Due to this, mutual funds usually outscore FDs during positive market conditions.

Inflation-adjusted returns

Inflation is infamous for eating a major chunk of one’s savings in terms of loss in the value of money. Thus, having investments that offer inflation-adjusted returns are imperative. Most FDs offer 9% interest rate, and if the rate of inflation is 8%, then the inflation-adjusted rate would be just 1%. Mutual funds on the other hand offer much better inflation-adjusted rates, albeit with a relatively higher risk.

Risk Appetite

FDs come with minimal risk, while mutual funds are known to carry higher risks than fixed deposits. One must invest in either one depending upon the individual’s risk appetite. One must also realise that high returns always come with high risk.

Liquidity

Mutual funds offer high liquidity options albeit with certain conditions. Fixed deposits have medium to low liquidity options until the tenure of the deposit is complete.

Premature withdrawal

Fixed deposits charge a penalty for premature withdrawal of funds from the deposit which would result in losing out a portion of your expected return. Mutual funds offer high liquidity options upon completion of the minimum holding period. If one needs to withdraw within the period of 1 year, then an exit load of 1% must be paid. Exit load conditions differ from fund to fund. One must make sure he/she is aware of the clauses present in fund invested.

Cost of investment

Every investment has a cost associated with it and it depends on the category of mutual funds you are investing in. A liquid fund may have an expense up to 1%, debt mutual funds can have a rate anywhere between 0.5% and 2.25% per annum. Equity mutual funds have a rate up to 3% p.a. This expense is adjusted in the returns you get. Fixed deposits have this advantage over mutual funds as bank FDs do not levy any expense on the depositor and the entire interest rate as promised by the bank is obtained.

Tax Status

The tax status of mutual funds is based on their category. Equity mutual funds are not levied with long term capital gains tax but short term capital gains tax are taxable at 15%. However, debt mutual funds are taxable with long term capital gains after a period of 1 year at 20% with indexation and 10% without indexation. Interest from fixed deposits is taxable according to your income slab.

The following table sums up the difference between fixed deposits and debt mutual funds and equity mutual funds:

 

Fixed Deposits

Debt Mutual Funds

Equity Mutual Funds

Investment Amount

1,00,000

1,00,000

1,00,000

Return % p.a

9%

9%

9%

Holding Period

1 Year

1 Year

1 Year

Fund Value

1,09,000

1,09,000

1,09,000

Inflation

7.5%

7.5%

7.5%

Taxable Income

9,000

1,500

-

Tax Paid

2,700

300

-

Post Tax Returns

6,300

8,700

9,000

 

 

Print Rate this article:
5.0

Number of views (371)/Comments (0)

rajyashree guha

Team Finapolis

Other posts by Team Finapolis
Contact author

Leave a comment

Name:
Email:
Comment:
Add comment

Name:
Email:
Subject:
Message:
x

Videos

Ask the Finapolis.

I'm not a robot
 
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
 
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above
Want to Invest
 
 

Categories

Disclaimer

The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free