Lately, people have not been just attracted to risk-free investments with steady returns, but they are also likely to invest in riskier instruments as they offer higher returns on the investments. The reason is quite simple! The attractive investments like fixed deposits do provide a fixed return. Still, the unpredictable state of the economy, declining employment, etc. are some of the factors that don't leave such investments as well. There has been a significant decline in the rate of interest on fixed deposits? Thus, there occurs a dilemma where you should invest funds?
Fixed deposits v/s Mutual Funds
Fixed deposits: The favored investment scheme
Fixed deposits are the investment instruments in which you deposit your funds as a lump-sum payment in an FD account for a fixed tenure and the banks or financial institutions pay you the principal amount and the interest earned at the end of the maturity period.
The tenure of fixed deposits can range from 7 days to 10 years. The financial institutions and banks determine the rate of interest on FD based on the RBI's policy. Presently, the rate of return on FD ranges between 4%-9%, varying from bank to bank. However, most of the smaller banks provide a much higher rate of interest than commercial banks. Another advantage of investing in an FD is that you can get the same return till the end of the tenure. Also, anyone can easily open an FD account through public or private sector banks, small finance banks (SFBs), non-banking financial companies (NBFCs), and post offices.
Mutual funds: Investments with high return
The concept of mutual funds is in contrast with the fixed deposits. In a mutual fund, the amount collected from the public is deposited in instruments such as shares, money-market instruments like the certificate of deposit and bonds, etc. You can invest in small-term, medium-term, and long-term mutual funds, depending on the financial goal. The idea of investing in mutual funds is to get higher returns, and the performances are based on market conditions. While most of the mutual funds, especially the equity mutual funds are highly risky, there are some mutual funds such as debt mutual funds, where one can invest in government securities with the lesser risks.
A comparison between fixed deposits and mutual funds:
Liquidity: When it comes to liquidity, mutual funds have higher liquidity. There is a restriction on the withdrawal of funds in a fixed deposit. If one withdraws the funds prematurely, then they have to pay penalty charges and thus lose out interest.
Loan: The individuals can also take a loan against fixed deposits up to 90% of the deposits of fixed deposits. Banks and financial institutions provide loans against FD at 1%-2% higher than the rate of interest on Fixed deposits. The good part is you can continue your investments without breaking the fixed deposit.
Risk: Fixed deposits have lesser risk than mutual funds as market conditions do not directly determine the returns on fixed deposits.
Returns: Mutual funds usually offer higher yields. However, to maximize profits on FD, you can invest in company FD, or you can invest in smaller and multiple FD instead of one significant investment to save taxes on your investment.
Thus, FD can be considered a better choice over mutual funds as it is safe, simple, and reliable. The returns on the FD are low, but you can earn higher returns by strategizing your investment.