Before we talk about what’s different, let’s see what’s similar.
Even though they both help you earn money on your savings, the two are very different. Even the advice you need before investing in either of them will vary greatly.
The most striking contrast between the two is that while fixed deposits are very safe, mutual funds are subject to market risk. Let’s look a little deeper into the differences:
|Criteria||Fixed Deposit||Mutual Funds|
|Risk Factor||Safest||Low-to-High Risk subject to market conditions|
|Rate of Return||Fixed rate of return usually at 8% p.a. on average.||Depends on the market. But a long-term investment sees an average of 16-18%.|
|Maturity amount||Guaranteed amount that is predetermined before you invest||Amount depends on how the market performs. Longer tenures see better returns.|
|Liquidity||No liquidity. Withdrawals may be allowed at a penalty.||Higher liquidity. Only investing in ELSS has a lock-in period of 3 years.|
|Inflation||No effect as returns are decided before investment.||Adjustments are made for inflation.|
|Taxation||Subject to TDS if interest earned exceeds Rs.10,000 p.a.||Subject to capital gains.|
Now, if you’re thinking about choosing between the two, you need to ask yourself how much risk are you willing to take? How much do you want to invest? How long do you want to invest?
Let’s see what a fixed deposit has to offer:
For example, AU Bank offers up to 8.80%* interest p.a. on its fixed deposit scheme. If you invest Rs.10 lakh for 10 years, you’ll get Rs. 23.2 lakh upon maturity. If you reinvest this for another 10 years, you’ll receive Rs. 53.9 lakh. *T&Cs apply.
Now let’s look at Mutual Funds:
Taking an example, if you invest Rs. 10 lakh for 20 years, you stand to earn an average of 18% p.a. You will get back Rs. 2.74 crores.
The return on investment is much higher in the long run, but it also carries some amount of risk.
‘Never put all your eggs in one basket’ holds true when it comes to investments. It is always advisable to make diverse investments. It’s best to keep a safe investment, but you can also invest half in something that will generate more money. This way you have stable funds, but you can also grow your wealth!