FD vs Mutual Fund | Key Differences Between FD & Mf

Advantages of Fixed Maturity Plans

Know about the various important benefits of choosing to invest in fixed maturity plans:

• Stable Returns: They offer a steady return because they invest in fixed-income instruments like bonds and government securities.

• Low Risk: Another important benefit of these plans is that they carry lower risk as they are not linked to market fluctuations, unlike equity funds.

• High Credit Quality: FMPs generally invest in high-rated debt instruments, which ensures the safety of capital.

• Good for Recession Periods: In times of economic downturns, FMPs may perform better as investors turn to safer options.

Limitations of a Fixed Maturity Plan

Know about the important limitations of a fixed maturity plan:

• Lack of Liquidity: You should know that these funds remain locked in until maturity which means there is a less chance for early or partial withdrawals.

• No Market Upside Benefit: Since the returns are fixed and so investors don’t gain from stock market rallies or equity growth.

• Lower Returns Compared to Equity: FMPs do not focus on equity investment which means the returns may be lower in a bullish market.

• Limited Flexibility: Investors can’t change their investment once committed; this could be a challenge if financial needs change.

• Not Ideal for Aggressive Goals: FMPs may not suit those looking to build wealth aggressively or take advantage of high-risk, high-return opportunities.

Taxation of Fixed Maturity Plan

Taxation on FMPs depends on the holding period.

• If the investment is held for less than 3 years, returns are treated as short-term capital gains and taxed according to the investor’s income tax slab.

• However, if held for more than 3 years, the gains are classified as long-term capital gains and taxed at 20% with indexation benefits.

This makes FMPs more tax-efficient over the long term. 

An Overview of Mutual Funds (MFs) & Fixed Deposits (FDs)

What are Mutual Funds and what are their benefits?

Mutual Funds (MF) pool money from multiple investors to invest in a diversified portfolio of stocks, bonds and other securities.

Mutual Funds Benefits

1. Diversification

By spreading your money across various investments, you reduce the risk of having all your funds in one place.

2. Professional management

Skilled fund managers oversee your investments, making informed decisions to maximise returns.

3. Liquidity

Mutual Funds allow you to convert your investments into cash quickly and easily, providing financial flexibility.

4. Access to various asset classes

Mutual Funds offer exposure to a wide range of assets including stocks, bonds and more, thereby diversifying your portfolio.

5. Convenience

Investing in Mutual Funds is hassle-free, making it accessible to individuals and institutions and simplifying the investment process.

6. Profit potential

Mutual Funds have the potential to generate attractive returns over time, allowing your money to grow steadily.

What are Fixed Deposits and what are their benefits? 

Fixed Deposits are financial instruments where you deposit a lumpsum amount for a predetermined period at a fixed interest rate. 

Fixed Deposits Benefits

1. Steady returns

Fixed interest rates provide predictable and stable returns.

2. Capital preservation

FDs safeguard your initial investment, ensuring that you do not lose your principal amount.

3. Low risk

FDs are generally low-risk investments, making them suitable for conservative investors.

4. Tax benefits

Tax-saving FDs offer tax benefits and attractive returns. This reduces your taxable income and increases savings. 

5. Liquidity

While they have less liquidity than Mutual Funds, FDs still provide access to funds during emergencies.

6. Ease of investment

FDs require minimal effort to set up and maintain, catering to various investors' preferences.

Who Can Invest in Fixed Deposits and Mutual Funds?

Mutual Funds and FDs are open for anyone to invest their money. The final choice depends on unique financial goals and preferences. If you are someone who wants stable returns with a slight risk factor, then choose to invest in mutual funds but if you want decent interest rates without market volatility, then an FD can be a great choice.

For someone putting their money in mutual funds, it is important that these are apt for people aiming for long-term wealth creation and if you are comfortable with market-linked returns and want to beat inflation, then go for mutual funds. Also, mutual funds are more liquid, which means you can access your money faster without heavy penalties. In FDs, there is a nominal charge for early withdrawals.

Difference between Fixed Deposit and Mutual Funds

FD vs Mutual Fund: What Should You Select?

There is no single answer when you are looking to select between FDs and mutual funds. There are several differences between FD and mutual funds, and both have their benefits.

Investors who are risk-averse and want fixed returns from their investment can consider bank FDs. However, if you have long-term investment goals and are looking for an investment option that can deliver higher returns, mutual funds can be an excellent option.

Conclusion

Fixed deposits and mutual funds serve different financial needs. While FDs offer stability and assured returns, mutual funds provide growth opportunities with some market risk. Choosing between them depends on your goals, risk comfort, and time frame. A balanced approach can help meet both safety and growth objectives.

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