We make investments intending to maximise returns on investment. In India, numerous investment options are available, some long-term and some short-term. Among all, the most popular investments are mutual funds and fixed deposits. Here we discuss the difference between mutual funds and fixed deposits.
What is Mutual Funds?
A mutual fund is a professionally managed investment scheme, usually run by an asset management company that pools a group of investors’ funds and invests them in stocks, bonds, and other securities.
You can purchase mutual fund “units” as an investor, which essentially represent your ownership share in a given scheme. The current net asset value (NAV) of the fund may be used to purchase or redeem these units as necessary . These NAVs fluctuate in response to the fund’s holdings. Therefore, the gain or loss of the fund is shared proportionally by each participant. Every single mutual fund is registered with SEBI. They operate in accordance with the tight regulations put in place to safeguard the interests of investors.
The main benefit of investing in a mutual fund is that it provides small investors with access to professionally managed, diversified portfolios of stocks, bonds, and other assets that may be very difficult to generate with a small amount of capital.
What is Fixed Deposits?
One of the most popular financial products that most banks provide to their clients is the fixed deposit, or FD. It is a preferred kind of investment by many risk averse investors since it is less risky than equity investments. In a Fixed Deposit, you place a lump sum of money into your bank account for a predetermined period of time at a fixed interest rate. The amount you invested plus compound interest is returned to you at the conclusion of the fixed deposit’s term.
A fixed deposit is a type of financial product provided by banks and NBFCs that allows you to deposit a lump sum of cash and earn more interest than a savings account would. An FD’s duration can be anywhere from seven days to ten years or more. Once you place a deposit with your bank, it begins to accrue interest based on the duration of the deposit. The main rule of a Fixed Deposit is that the money can be withdrawn before maturity. In addition, if you remove your funds prior to maturity, you may be required to pay the penalty.
Fixed Deposit vs Mutual Fund: Key Financial Parameters
Here is the few financial parameters in fixed deposit vs mutual fund. Consider how FDs outperform mutual funds in terms of security:
- Portfolio diversification: Banks’ portfolios are diverse since they lend to both corporate and individual consumers. Banks offer personal loans, house loans, two-wheeler/four-wheeler loans, and other loan products to attract as many consumers as possible. In contrast, equity mutual funds often invest in the top 25-100 companies. Banks, on the other hand, have millions of clients who rely on them.
- Every FD is insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation), a wholly-owned subsidiary of the Reserve Bank of India (RBI). This policy has a maximum payout of Rs. 5 lakh. That is, if a bank fails, the DICGC must pay the investor the amount of their FD (only up to Rs 5 lakh).
- Returns on FDs are assured since there are no market risks. As a result, banks guarantee returns.
Fixed Deposit vs Mutual Fund
| Criteria | Mutual Fund | Fixed Deposits |
| Returns | Returns on investments are directly proportional to the market conditions in which the funds are invested and are wholly reliant on the activity level in the stock market. | In fixed deposits, one gets a guaranteed rate of returns at a predetermined rate and for the said tenure. |
| Risk | Each mutual fund has its unique level of risk, determined mainly by the state of the stock market. | FDs are risk-free investments since the depositor is rewarded with guaranteed returns at a predetermined interest rate. |
| Expenses | Mutual funds are subject to various expenses and premiums as a standard cost of doing business. | No charges are levied on the deposit at any point, not even when it begins. |
| Withdrawal | After a certain period has passed, you will be able to take money out of a mutual fund. If you withdraw before the deadline, you will not be subject to the exit cost of one per cent. | Those who have made deposits and want to withdraw their funds must do so within the early withdrawal period or face a penalty. |
| Taxation | Every mutual fund must pay taxes on both long-term and short-term capital gains. The STCG is levied at a fixed rate, while the LTCG is paid on profits of more than Rs. 1 lakh. After factoring in inflation, the long-term capital gain rate for debt funds comes to 20%. | When total FD interest for the year is moreover Rs, 10,000, a tax withholding percentage of 10% is applied. |
Risk Associated with Mutual Funds
- Credit Risk: When you participate in large-cap mutual funds, the money you contribute will be distributed among the top 20-50 publicly traded firms in India. If you want a better idea of these companies’ worth, you can look at the Nifty50, ranking the top 50 companies in the Indian stock market. These top 50 companies have a market value (capitalisation) of Rs 113.5 lakh crore, equivalent to about 60 per cent of India’s total gross domestic product (GDP). These companies are the most powerful enterprises in a total of 14 different industries, including the automotive, pharmaceutical, and financial sectors. The Indian economy is so reliant on these companies that it is almost impossible for all of them to fail simultaneously, which may result in the loss of your investment.
- Risk in the Market: As you know, mutual funds are susceptible to market risks. On the other hand, the Nifty 50, a widely watched barometer of the stock market’s success, has never provided a negative return for investors who invested for at least ten years. It has achieved a compound annual growth rate (CAGR) of at least 5.5 per cent over the last 20 years, with an average CAGR of 12.3 per cent during that period (about current FD rates). Therefore, the stock market is an excellent choice if you want to invest long-term.
How Mutual Funds work?
A typical mutual fund invests in over a hundred different assets, providing mutual fund owners with a high level of diversification at a reasonable cost. Suppose a person purchases all the shares of Google stock before the business reports a terrible quarter. They might lose substantial capital since they have all their assets tied to a single corporation.
In contrast, a private investor may acquire shares in a mutual fund that invest in google. As a result of Google’s small percentage of its assets, the fund suffers less when it has a poor quarter.
If a mutual fund is considered a virtual corporation, the fund manager, often known as the investment advisor, is the CEO. A board of directors hires the fund manager, legally mandated to work in the best interests of mutual fund shareholders.
The vast majority of fund managers also own funds. A mutual fund firm employs a modest number of additional people. Financial advisors or fund managers may hire analysts to assist with investment selection or market research. A fund accountant is engaged to compute the NAV of the fund, which is the portfolio’s daily value that determines whether share prices rise or fall. Mutual funds should have at least one compliance officer and maybe an attorney to comply with government requirements.
Mutual Fund Returns
Buying mutual fund shares isn’t the same as buying stock. Mutual fund shares, unlike stocks, do not provide investors voting rights. A mutual fund share comprises numerous stocks (or other assets) rather than just one.
As a result, a mutual fund share price is known as the net asset value (NAV) per share (NAVPS). Dividing the total market value of a fund’s holdings by the total number of outstanding shares determines the NAV.
A company’s stockholders, institutional investors, and corporate insiders have a stake. In contrast to stock prices that fluctuate during the trading day and are settled after each trading day, mutual fund shares are typically purchased or redeemed at the fund’s current NAV. In other words, mutual fund prices likewise move when the NAVPS is settled.
Types of Mutual Fund Returns
- Annualised return
These are mutual returns that one gets annually. For instance, X has invested Rs. 1 lakh in a mutual fund for three years. The return on investment will be Rs. 1.4 lakh. Approximately the mutual return will be 40% in 3 years. However, the annual return will be approximately 11.9%.
- Total Return
These mutual returns are the actual return one gets in return on investment. The dividends and capital gains are also part of the total mutual returns. For example, you invested Rs. 1 lakh in an MF scheme, and the NAV is Rs. 20. Since you bought the mutual fund for Rs. 1 lakh and NAV is Rs 20, it states that you bought 5000 units. As a result, the value of mutual funds will be Rs. 1.1 Lakh and the NAV will increase to Rs. 22 ( 5000×22). The capital gains will be Rs 10,000.
- Trailing return
Trailing mutual fund returns are annualised returns that end in a day only. A Microsoft Excel sheet is the easiest way to calculate the mutual fund’s return. Today’s NAV / NAV at the beginning of the trailing period) ^ (1/Trailing Period) – 1.
- Point-to-point return
It is the annualised return taken into consideration between two points of time. All you need to do is know the suitable start date and closing date of the mutual fund scheme for which you are looking for a point-to-point return.
- Annual mutual fund returns
It is a return one earns yearly, starting January 01 to December 31. For instance, NAV is Rs. 100 on January 01, and in December, the NAV is Rs. 110. The annual return will be 10%.
- Rolling returns
The rolling mutual returns are credited daily, weekly, and monthly to the investor’s account. Examples of rolling returns are midcap funds, balanced funds, large-cap funds, equity funds, diversified funds, etc.
What is the minimum investment required for Mutual funds?
There are different types of mutual funds, so the minimum mutual fund investment varies from one type to another. When making a SIP investment, the minimum investment required for mutual funds is Rs. 500.
If you are investing in lump-sum, the minimum mutual fund investment will be Rs. 5000. The fund houses only insist on making a considerable investment when you start; otherwise, the subsequent investment is Rs. 1000.
Here is the comparison of how fixed deposit vs mutual fund interest rates.
| Particulars | Debt Funds | Fixed Deposits |
| Rate of interest | 7-9% | 6-8% |
| Dividend Option | Yes | No |
| Risk | Low to moderate | Low |
| Liquidity | High | Low |
| Investment option | Choose between a SIP investment and a one-time Investment | Can choose a lump-sum Investment |
| Early withdrawals | Yes | You have to pay the penalty for early withdrawal |
What are the Fixed Deposit Interest rates of top banks?
| Bank | Interest Rates |
| State Bank of India | 2.90-5.40% |
| HDFC Bank | 2.50-5.50% |
| IDBI Bank | 2.90-4.80% |
| Punjab National Bank | 3.0-5.25% |
| Canara Bank | 2.90-5.50% |
| Axis Bank | 2.50-5.50% |
| Bank of Baroda | 2.80-5.25% |
| Punjab & Sindh Bank | 3.10%-5.25% |
| IDFC Bank | 2.75%-5.75% |
| ICICI Bank | 2.75%-5.50% |
A fixed deposit is also known as a term deposit and FD. One opens a fixed deposit account in NBFCs and banks by comparing interest rates. FDs are a great way to make small investments, one of the best saving plans on a guaranteed return rate.
Example
Suppose you invest money in fixed deposits at a 5 per cent rate of interest; during the end of tenure, the interest you will get on fixed deposits will be 5%. It remains constant and does not fluctuate even with the change in the market conditions.
Fixed Deposit vs Mutual Fund: Which is Better?
A fixed deposits returns are much lower than an equivalent investment in mutual funds, although it provides a guaranteed income. An investigation that compares the two will offer a more comprehensive view.
The bank uses the money you invest in an FD to provide loans to various businesses. When you invest in equity mutual funds, the asset management firm (AMC) uses the money you’ve saved to purchase stocks on the stock market. This is done with the intention of increasing the value of your investment. Your money will, in the end, be invested in companies regardless of the investment you choose, and your assets will be exposed to credit risk in the process.
When individuals put their money into bank fixed deposits (FDs), on the one hand, they get a sense of calm. They have no reason to be concerned about the dangers associated with the investment. Customers worry that their finances might suffer when they put their money into mutual funds (MFs).
There is always a possibility of loss whenever money is given to other people, whether done via FDs or MFs. When comparing the two, there is a significant gap between the returns on large-cap stock mutual funds and those on bank fixed deposits.
To summarise, while making an investment choice, you need to keep all considerations mentioned earlier in mind since, although an investment in a fixed deposit is more secure than an investment in a mutual fund, the cost of this safety is enormous, and the profits are pitifully poor.
Mutual funds prove to be the wise option for a risk-taker looking for higher returns. The reason is that mutual investment assets are divided equally into equities and debts. The higher the risk, the better the opportunities for mutual fund returns. Get to know different types of mutual fund returns.
You may also use the Kuvera app or portal to safely invest your hard-earned money in a Tax Saver Fixed Deposit or mutual fund per your risk-taking ability. One of the best ways to increase your wealth.
FAQ on Fixed Deposit vs Mutual Fund
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What is a mutual fund?
A mutual fund is both a company and an investment vehicle. Even though this dual nature may appear strange, it is similar to how an Apple Inc. (AAPL) stock reflects the company. In other words, when someone buys Apple stock, they get a piece of the company and its resources. Furthermore, a mutual fund investor acquires an equity stake in the mutual fund company and its assets. The difference between Apple and mutual funds is that the former develops groundbreaking items like iPads, while the latter invests.
Mutual funds aggregate client funds to purchase other assets like stocks and bonds. The value of the mutual fund company is determined by the performance of the assets acquired. When investors buy a mutual fund unit or share, they purchase the portfolio’s performance or, more accurately, a proportion of the portfolio’s value.
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How does a fixed deposit work?
You may circumvent the KYC procedure and transfer cash from your savings account if you create an FD account at the same bank where you have a savings account.
After maturity, you may transfer the FD money to your savings account or renew it for India’s Best Fixed Deposit Rates. The funds will be reinvested as a fixed deposit in the second situation. If you prematurely terminate your FD, you will get less of the best-fixed deposit interest rates, and a penalty will be deducted from your FD balance. Consider all advantages and disadvantages and the interest rates different banks give for FDs before making a final decision.
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Do we get an interest rate in mutual funds?
No, the returns on invested mutual funds are determined by how well the fund performed relative to the market and the industry.
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Is FD a good investment?
FD has a predetermined rate of interest with returns that are guaranteed. It is, without a doubt, one of the most secure investment types.
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