Know the difference between Mutual Funds vs Fixed Deposit before investing

Know the difference between Mutual Funds vs Fixed Deposit before investing

The concept of investing has evolved in quite an exciting and exponential way. Investors these days wish to explore new territories but also do not want to abandon the traditional forms of investing. Talking about traditional methods, you can never miss out on FDs. Likewise; mutual funds are also catching up as one of the most preferred investment types in the market. It is essential to analyze the differences between both before choosing the best option. Before understanding the significant differences between a mutual fund and FD, we need to define them accordingly.

Fixed Deposit (FD):

Fixed deposit (FD), one of the most conventional forms of investing, involves the depositing of a considerable amount of money in the bank/NBFC for a fixed tenure and rate of interest. The financial institution will pay the interest amount to the depositor based on various types of payout models available. The risk factor is typically lower than in mutual funds.

Mutual Funds:

Mutual funds also have multiple types where an investor would invest the money as shares in a public firm which will provide returns, (although not fixed) in the long run. Mutual funds do carry risk factor as the returns are dynamic and are subject to the performance of the firm in the market.

Difference between a mutual fund and a fixed deposit:

Factors Mutual Fund Fixed Deposit
Return on Investment Dynamic and can range between 12-15% in the longer run Pre-defined and do not change throughout the tenure. Can get returns of 6-6.8%
Safety Subject to market factors and performance of the company in which you have invested Considered to be the safest financial instrument by many and have a null risk factor if invested in a reliable bank/NBFC
Inflation Inflation favors the investor, and he/she can get better returns Since the interest rate is fixed, the return is the pre-defined and does not gets affected
Liquidity Have higher liquidity as you can sell the shares at any time without affecting the depreciation value of the funds Penalty charges will be applicable in case you break FD, and the returns will be impacted
Tax Savings ELSS or Equity Link Savings Scheme funds save tax as they have a lock-in period of 3 years and hence you are eligible for tax exemption.

Other types of mutual funds are taxable

If you have opted for a fixed deposit with a lock-in period of 5 years, you will be exempted from tax as per 80C provision of IT act.

Key takeaways:

If you believe in traditional forms of investment and do not wish to take risks, you can opt for FDs. However, if you want higher returns and willing to take risks, you can opt for mutual funds. Note that you should do a thorough study of various investment options online before choosing the best investment option. For example, PNB housing finance FD reviews available online can provide you with deep insight into their offerings. Likewise, you can dwell deeper into various offerings and decide for yourself.

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