What Is The Difference Between Fixed Deposits And Mutual Funds? | AU Small Finance Bank
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What is the Difference Between Fixed Deposits and Mutual Funds?

    There is a vast difference between fixed deposit and mutual funds. Both are popular choices among investors, but they each are unique and give you different returns.

    Before we talk about what’s different, let’s see what’s similar.

    • They are investment schemes
    • They offer a return on the principal you invest
    • They offer various tenures to choose from

    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?

    How to Choose between a Fixed Deposit and Mutual Funds?

    Let’s see what a fixed deposit has to offer:

    • If you do not like to take any risk whatsoever, then an FD is your best option. The interest is fixed and you are guaranteed to receive the set amount upon maturity.
    • You can choose to invest for as little as 7 days up to a maximum of 10 years. So, you can choose how many years you want to commit.
    • FDs are a one-time investment. Therefore, you can deposit and forget about it. There is no need to monitor the deposit.
    • You can easily open an FD at any bank or even online.
    • A fixed deposit is accepted as security against a loan.

    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:

    • It is a professionally managed investment scheme.
    • It pools in money from a number of investors and buys bonds, equity shares and other money market instruments.
    • You become a unitholder when you buy mutual funds. Unitholders share the profits, losses and expenses.
    • You have a variety of funds to choose from.
    • It is most suitable for long-term investment.
    • You can make a lump sum investment or choose to invest in installments (SIP).

    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!


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