Recently, the number of people investing in mutual funds has increased tremendously, while bank fixed deposits remain popular.
Banks offer attractive interest rates, which attract large amounts of money to fixed deposits, which offer a fixed interest rate for a predetermined period.
The decision of which scheme to choose for investment can be difficult for many. However, the choice can depend on one’s age and risk tolerance. Let’s explore the differences between fixed deposits and mutual funds:
Fixed Deposits:
Fixed deposits involve banks or financial institutions accepting money at predetermined interest rates for a fixed period.
The interest rate varies based on the maturity tenure, providing a steady interest income. These deposits do not have a separate management unit.
There is no risk involved, and the investment and interest are guaranteed. The tenure of these deposits ranges from 7 days to 10 years, and the money can be withdrawn before maturity.
Different fixed deposit schemes are available, including standard, tax savings, unique, corporate, regular, and special deposit schemes for senior citizens. These are best suited for those seeking low-risk investments.
Section 80C provides tax exemptions. No additional charges exist, and interest income is taxed according to a fixed slab.
Mutual Funds:
Mutual funds involve pooling funds by fund houses to invest in diversified portfolios of stocks, bonds, and securities.
Returns from mutual funds depend on market performance, ranging from exceeding inflation to incurring losses. Professional fund managers manage these investments.
Mutual funds carry a high level of risk, and profits and losses are tied to market performance. Withdrawals and fund transfers typically take 2-3 days, and some funds have a lock-in period and exit load.
Different mutual fund schemes, including equity, debt, and hybrid funds, are available. Mutual funds are suitable for those who can tolerate market risk.
ELSS funds can provide tax exemptions through Section 80C. Charges typically range from 2-5 percent on investment, and if the income exceeds Rs. 1.25 lakh, a long-term capital tax of 12.5 percent may apply.