• HDFC securities
• 27 Mar 2023
• Knowledge Centre

 

 

There are several investment options available to investors that enable them to improve their financial standing and achieve their various goals. Mutual Funds and Fixed Deposits are two of the most popular investment options, each offering unique benefits to investors. While Fixed Deposits are considered a traditional, safe investment option, Mutual Funds offer the potential for higher returns through market exposure.

It is important for investors to understand the difference between fixed deposit and mutual fund, their characteristics and nuances before making investment decisions.

About Fixed Deposits

Fixed Deposits (FD) are one of the simplest and most traditional investment options. You make a significant one-time, lump sum investment. FDs earn you regular returns at a predetermined interest rate. You hold your FD investment for a fixed tenure. The investment is nowhere linked to market volatility, hence a safe investment option.

Fixed Deposits are of two types – Cumulative and Non-cumulative Deposits. With cumulative deposits your interest earnings get added to your principal sum, helping you maximise returns. With non-cumulative deposits, you opt to receive your interest earnings periodically.

About Mutual Funds

Mutual Fund is a market-linked investment vehicle that pools money from investors having alike goals and invests them in various assets. Based on assets a fund invests in they can be classified into three main types – Equity Funds, Debt Funds, and Hybrid Funds.

Since mutual funds are market-linked investments, the returns are not guaranteed. Hence you must always act in accordance with your risk appetite.

Mutual Fund vs Fixed Deposit – Key differences

Following are the major points of differences between Fixed Deposits and Mutual Funds:

• Investment returns

Investment returns are undoubtedly the primary differentiating factor between the two investment options. Banks offer a fixed interest rate on FDs based on investment tenure, making the returns on FDs fixed and regular. Mutual Funds possess the potential to earn you higher returns than FDs. However, MFs carry a certain level of risk.

• Investment mode

You can invest in Fixed Deposits only by making a lumpsum investment. You can invest in Mutual Funds in two ways – lumpsum investment and Systematic Investment Plan (SIP). By opting for Mutual Fund SIP, you are able to build your corpus by making small, periodic contributions.

• Tenure

You invest in Fixed Deposits for a fixed tenure. You cannot make a partial withdrawal from your investment; you need to withdraw your investment altogether. There is no fixed tenure or lock-in period for mutual funds. You can invest or withdraw your money from mutual funds anytime. However, only Equity Linked Savings Schemes (ELSS) funds have a lock-in period of 3 years.

• Risk associated

Fixed Deposits are one of the safest investment options to explore. There is no risk associated with investing in them. Mutual Funds are linked to markets, hence involving a certain degree of risk. There is risk is unavoidable, however, it can be mitigated by creating a diversified portfolio.

• Investment cost

Typically, only a basic processing fee is associated with fixed deposit investments. With Mutual Funds, you are liable to pay a specific expense ratio. The expense ratio differs for every fund house and the type of fund you have invested in.

Fixed deposit or mutual funds, what should investors select? Both investment vehicles offer unique advantages and disadvantages. Investors must make informed investment decisions depending on their financial goals, risk tolerance, and investment horizon.