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Deciding where to invest your hard-earned money can be difficult, especially when deciding between contrasting options like mutual funds (MFs) and fixed deposits (FDs).
Both offer unique benefits, but accommodate different financial goals and risk tolerances.
If you are looking for guaranteed returns and principal preservation, FDs may be the best option for you. But if you take a long-term view and can tolerate some volatility while chasing higher returns, MFs could be the key to unlocking your financial potential.
Let’s see what experts say about such a scenario.
Santosh Joseph, Founder, Refolio Investments and Germinate Investor Services LLP said: “Mutual funds, especially in the fixed income category, have a very wide spectrum available within the fixed income space. There are funds, credit risk funds, duration funds, etc. They all have different parameters to look at.”
Mutual funds are convenient for investors who have plenty of time and want to earn as high a return as possible.
“With an FD, you are lucky if you lock your money at a high interest rate because if interest rates go down, you miss out on high returns.On the other hand, with mutual funds, if you lock your money at a high interest rate, you are lucky to get a fixed income product. Because existing yields are valued, there is a way to capture interest rate softening so you can actually continue to benefit from it.”
Adhil Shetty, CEO, BankBazaar.com, said mutual funds are long-term investments that offer comparatively higher returns than fixed deposits.
It also comes with higher risks.
“Term deposits are a low-risk savings option that provides stability to your portfolio with steady returns. They are ideal for investors nearing retirement and looking for capital preservation and fixed income income.”
“The returns offered by fixed deposits, while stable, may not be enough to help you reach your financial goals. Mutual funds, on the other hand, may offer above-inflation returns that can help you reach your goals. There is a gender,” Shetty added.
Another factor to consider when comparing these two instruments is taxes. Mutual funds are taxed only when they are redeemed or sold at a profit, and are not taxed when the profit is earned. In contrast, FDs, even if they accrue interest, are taxed as per the applicable tax slab.
Term deposit returns are fairly predictable and easy to calculate. For example, his 5-year FD earns around 5-8% interest per year, giving him a steady source of income. In contrast, returns on mutual funds, although higher than those on FDs, can fluctuate with market conditions and are uncertain.
“It is important to consider your risk appetite, investment period and financial goals before choosing an investment. If you are looking for stability and want to avoid risk, fixed deposits are recommended. However, long-term If you’re looking for growth and can withstand market volatility, mutual funds may be right for you. You may also want to work with a financial advisor who can help you develop an investment strategy that’s tailored to your financial situation. You can,” says Shetty.
While FDs are very popular, bond mutual funds are also becoming more popular. It offers a very wide range of fixed income products between risk and reward as well as duration. So, the advantage of mutual funds is that it gives you more options, flexibility and wider scope of participation in not only FDs but also various fixed income instruments available in the market.
“For investors who are not necessarily focused solely on bank deposits, there is a very good opportunity to consider mutual funds as part of your fixed deposit investment return allocation,” Joseph says.
He says the risks are not the same and the liquidity profile is slightly different, but the advantage is that you don’t have to worry about locking in for a certain period of time to get a certain return. Mutual funds invest in multiple bonds or multiple deposits on your behalf, so you don’t have to worry about all your money being concentrated in his one investment.
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