Fixed deposits and mutual funds are two investments widely diversified amongst investment seekers, each having varied characteristics that appeal to different investment goals. Mutual funds involve investing in equities, bonds, and commodities like gold, upon which returns are offered based on the market's performance of these instruments. A fixed deposit offers a fixed return over a certain tenure. You can opt for fixed deposits through either the banks or the non-banking financial companies (NBFCs), but mutual funds are issued by fund houses.
What is a Fixed Deposit?
A fixed deposit, from banks and NBFCs, is a financial instrument under which you can deposit a sum of money for an exactly defined duration to earn an assured rate of interest. The accrued interest will be applied as a constant amount during the full tenure of the deposit. And when the term expires, you receive your principal along with the interest that was accrued. Fixed deposits are safe investment options since it gives assured returns with capital protection of the amount of capital invested.
With the help of an online FD calculator, it is easier to calculate how much maturity value your fixed deposit holds and how one should plan his investment.
Why Invest in a Fixed Deposit?
Some key benefits of investing in a fixed deposit are as follows:
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Guaranteed Returns
Needless to say, an FD gives you assured returns on investment irrespective of any kind of market or economic condition in the market. The interest for the whole period of the deposit is fixed, so you know how much you will earn at what time.
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Risk-Free Investment
FDs are low-risk investments as they are immune to market fluctuations. The corpus is safe, and the interest accrued is assured that makes them an appropriate investment for risk averse investors.
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Higher Interest Rates Compared to Savings Account
The rates of FD are always a little more than the saving account rate. Hence, you get more without risking your investment.
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Tenure Flexibility
There are many kinds of tenures which are available along with the FD. These are available in a few months to several years, and a selected tenure may well suit a person's financial goals.
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Tax Benefits
Tax-saving fixed deposits will also allow the deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. The senior citizens are also exempted from tax incurred on the interest earned from the FDs.
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Liquidity with Premature Withdrawal
The key benefit of FDs is that it ties up your savings for a specified duration, but you can withdraw your amount prematurely in case of any urgent need. Usually, this results in penalty charges and a lower interest rate.
What Is a Mutual Fund?
Mutual fund is an investment vehicle, while pooling money from multiple investors, creates a diversified portfolio of stocks, bonds, and other securities. For this purpose, a mutual fund invests money with the objective of generating returns in alignment with the fund's investment objective under the management of professional portfolio managers.
Mutual fund schemes can be either an actively managed type wherein the fund manager tries to achieve a better return over the market index by trading frequently, or passively managed, wherein the fund merely follows the market index, such as Nifty 50 or S&P 500.
Advantages of Mutual Funds
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Market-Linked Returns
The mutual fund return will be dependent on the market. Meaning that while the market performs well, returns can be better than with fixed deposits. However, the risk is there that one might also face negative returns in the event of a lousy market.
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Likelihood of Beating Inflation
Mutual funds, especially equity funds, some hybrid funds, etc. can really go a long way in providing inflation-beating yields and thus, making a good case for a long-term wealth-creation solution.
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Diversification
Mutual fund investments in different stocks, bonds, or other assets come with the inherent benefit of spreading the risks to the investor. Thus, diversification can limit the impact of a loss-making security on a portfolio.
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Professional Management
With professional fund managers in charge, mutual funds enjoy the advantage of professional research and decision-making. This provides the investor with the benefit of making use of professionals without having to be actively involved in the management of the investment.
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High Liquidity
Mutual funds are quite liquidly bought and sold, which allows investors the option of letting access to their money when needed. This liquidity makes mutual funds suitable for either short term or for long term investment goals.
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Investment Flexibility
Mutual funds can be invested as a lump sum, or investors can opt for a systematic investment plan wherein the investments are made gradually over time. There's no amount locking-in. In fact, it's more flexible.