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It is essential to invest your money to give it an opportunity to generate returns for you. There are various investment avenues available in the market, like life insurance policies, fixed deposits, and mutual funds.
Fixed deposits (FDs) are the most traditional investment options and have been used by Indian investors for capital preservation. On the other hand, people have started investing in mutual funds in the last few decades. To choose the right investment instrument, you must understand these two instruments and know fixed deposit vs mutual fund India.
Therefore, here is a detailed guide to the meaning of FD and mutual funds and fixed deposits vs mutual funds differences.
Understanding Fixed Deposits
A fixed deposit is an investment instrument offered by banks and Non-Banking Financial Companies (NBFCs). Fixed deposits are practically risk-free. A fixed deposit account holds a fixed sum of money for a predetermined duration. It provides fixed Returns decided by the financial institution at the time of opening the FD account.
Once the FD interest rates are locked, they stay unaffected by market fluctuations or changes in the interest rates offered by the institution. Fixed deposits provide better interest rates than bank savings accounts. Moreover, you can choose a fixed deposit tenure according to your investment goals.
Understanding Mutual Funds
A mutual fund is an investment instrument that collects money from multiple Individual and institutional investors to invest collectively in a portfolio of stocks, bonds, and other assets. A professional fund manager manages a mutual fund with the aim of providing better returns than individual stocks.
You can find a variety of investment options in mutual funds, like equity funds, debt funds, and hybrid funds, depending on your financial requirements and investment needs.
Difference between Mutual Funds and Fixed Deposits
It is necessary to understand the mutual fund vs fixed deposit difference to choose the right investment option for yourself.
Parameter |
Fixed Deposits |
Mutual Funds |
Nature of Investment |
It is a debt instrument with a fixed tenure and predetermined rate of return. The invested amount is also fixed. |
This instrument pools money from multiple investors to create a Portfolio that includes several asset classes. |
Returns |
Guaranteed@ and predefined Returns that do not depend on the market. |
The returns are linked to financial markets and the asset classes included in the portfolio. Therefore, the returns may vary depending on the market situation. |
Risk Involved |
Low-risk investment option |
Medium to high risk as the investment is subject to market volatility. |
Withdrawal |
A fixed deposit has a lock-in period. You must pay a penalty to withdraw prematurely from a fixed deposit. |
No charges on withdrawal after a stipulated period. An exit load is charged on withdrawals before the stipulated period. |
Expenses |
No expenses involve starting or maintaining a fixed deposit. |
You must pay fund management fees to the fund manager or Asset Management Company handling your mutual fund portfolio. |
Taxation# |
As per the investor’s Income Tax# slab. |
Provide long-term capital gain tax# advantage. |
Investment Mode |
lump sum investment |
Can be a lump sum investment or a systematic investment plan. |
Regulation |
Regulated by RBI |
Regulated by SEBI |
Impact of Inflation |
Returns are unaffected by inflation |
Returns are inflation-adjusted |
How to Invest |
You can invest through a bank or an NBFC. |
You can invest through an Asset Management Company. |
Mutual Funds or Fixed Deposits: which is Better?
Whether you should invest in a fixed deposit or mutual fund depends on several factors, like your risk appetite, investment goal, and expected returns. Let us see who should invest in fixed deposits and mutual funds:
Who Should Invest in Fixed Deposits?
Investors unwilling to take a market risk on their investments.
Senior citizens who won a regular source of income after their retirement.
Investors with a taxable# income.
Homemakers who want to develop a habit of investing their savings.
Who Should Invest in Mutual Funds?
Investors who want higher returns on their investment and are ready to take some degree of market risk on their money.
Investors who want to diversify their investments.
Investors who want inflation-beating returns.
Secure your Future with Tata AIA Life Insurance Plans
While fixed deposit schemes and mutual funds are both good investment instruments, you can further diversify your portfolio by adding an insurance plan to your investment basket. A life insurance plan ensures the financial safety of your loved ones, even in your absence.
You can choose a Tata AIA insurance Company plan to meet your investment goal, like retirement planning, wealth creation, generating savings, securing your health, etc. Moreover, to save your time and effort, you can buy life insurance plan online with us through a simple and quick digital process.
Our customer-centric insurance plans offer several unique features and benefits, like a 4-hour express claim settlement facility, transparent claim processing, a high claim settlement ratio, and a nationwide presence.
Wrapping Up
Fixed deposits and mutual funds are both great investment tools with unique characteristics. While FDs are almost risk-free, mutual funds allow you to benefit from growing and evolving financial markets. Choose an investment instrument that matches your investment needs. You can further diversify your investment portfolio by adding the security of a life insurance plan to it.
