A mutual fund is one of the best avenues for high returns. Though an investment in mutual fund is subjected to market risks at the same time, it is likely to earn you more interest than any other investment option including fixed deposits. Read on to know other factors that justify why you need to invest in mutual fund and not in a fixed deposit.
The Risk: The key advantage of investing in mutual funds is high returns that you may get when market is ripe. Unlike FD rates that are fixed and pre-determined for the entire tenure, the returns on mutual fund may vary as per the market conditions. This means, if the market is favorable, you are likely to earn good returns while the interest on MF investment may go down in an unfavorable market condition. So you should consider your risk appetite while investing in a mutual fund.
The Return: FD rates can be pre-estimated. However, returns on mutual fund investment majorly are dependent on how effectively your fund manager manages the portfolio, the instruments you have invested in and also on the market conditions. For long-term capital gains, investing in equity-based funds is effective.
Liquidity: Mutual funds offer high liquidity but again it depends on the scheme you have invested in. There are open/close-ended schemes, schemes with lock-in period and exit load, etc. all levy different charges for pre-withdrawals. Alternatively, in fixed deposits, the liquidity is based on the deposit term. The option to withdraw money from bank fixed deposit is always available but you would lose out a portion of interest earned.
Investment Cost: The cost of investing in mutual funds depends on the scheme you are investing in. For example, investing in a liquid fund may have a low expense of up to 1% per annum, debt mutual funds generally charge 0.50% per annum to 2.25% per annum and the cost of investing in equity mutual funds may be up to 3.00% per annum. Fixed deposits, on the other hand, have an advantage on this parameter as they include no cost of investing.
Tax Connotation: In FD rates, the tax is charged on the basis of your tax slab (i.e. as per the market rate of taxation) irrespective of the FD deposit term. Investing in mutual fund, on the other hand, is more tax efficient. For example, if an equity-based mutual fund scheme is held for the long-term (more than one year) then it offers a tax exemption. However if the units of equity schemes are held for short-term (12 months or less), a 15% tax is levied. On the other hand, long-term investment in debt mutual funds is taxable at twenty percent with indexation and ten percent without indexation. While the short-term capital gains from liquid and debt mutual funds are taxed according to your current tax slab.
The table below illustrates a quick comparison between FDs and Mutual Funds:-
Deciding
factors
|
Mutual Funds
|
Fixed
Deposits
|
Returns on
Investment
|
No Assured
Returns
|
Fixed and
pre-determined returns
|
Risk
|
Medium to
high depends on the invested funds
|
Low risk
|
Pre-mature
withdrawals
|
Allowed with
exit load
|
Allowed with
penalty
|
Tax
Deduction
|
as per the
investing scheme
|
As per the
tax slab
|
Cost of
investment
|
Yes
|
No
|
Note: Both fixed deposit and mutual funds are good investment avenues but before investing in any of these options, consider the amount you want to invest, the deposit term (short or long term) and your risk appetite, like how much financial loss you can bear.
