Which mutual fund is best for a fixed deposit?

Is your fixed deposit maturing and you are looking for some other good investment alternative? Mutual Fund (MF) is one of the most-sought-after investment options that perfectly cater to the wide-ranging investment needs of people. Though there are some sorts of risks associated with mutual fund investment but by choosing a right hodgepodge of funds, you can get the most from MF investment. However, before moving further, we want investors to understand the very difference between mutual fund investment and fixed deposit so that they can easily decide on an avenue to choose.

In this context, the major difference between the two is that of an interest rate. While the rate of interest in MF investment tends to fluctuate as per the market conditions, fixed deposit interest rates remain fixed throughout the investment tenure. Alternatively, fixed deposits promise assured returns whereas MF investments are subjected to market risks. This means, if the market burgeons, the investment is likely to yield better results and vice versa. The nature of risk in Mutual Funds, however, depends on funds to funds but the fundamental point here is that mutual funds do not provide assured returns and are not risk-free as in the case of fixed deposits. But if you go by the rule where the risk and returns go hand in hand, taking a small risk to earn good returns is worthy in every sense.

Risks Associated With Mutual Fund Investment

Here is a sneak-peak into different types of risks associated with Mutual Fund investments:-

Different mutual funds have dissimilar risks associated with each one of them. This is why the Security and Exchange Board of India (SEBI) has come up with a labeling system (Risk-O-Meter) for evaluating the risk of different mutual fund products. To find the risk grade of different funds, you can visit the official website of the asset management company.

Plus we’ve also enlisted the different categories of debt mutual funds underneath:-

1. Low-risk funds: In general, different categories of debt mutual funds are considered as low-risk funds. Investors looking for low risk of their funds and can withstand just a small capital loss can invest in this kind of fund. Low-risk funds are good investment options if an investor is ready to afford minor fluctuations in their capital investment.
2. Medium risk funds: As the name depicts, this mutual fund schemes come with moderate risk. The returns in these kinds of funds are more impetuous. Also, the risk associated with medium risk funds is slightly higher from low-risk funds. However, these funds can yield better returns than low-risk funds. Investors looking for income and capital appreciation can consider investing in Medium risk funds over fixed deposits that promise assured returns but at a lower rate of interest. Different types of hybrid mutual funds including both equity and debt funds, like equity savings funds and monthly income plans are included under this risk grade category.
3. High-risk funds: This type of mutual fund products comes with high risk. Here the loss of capital is highest in short-term investment but in the long run, these high-risk funds are sure to provide highest returns. Investors looking for a long-term investment with higher capital appreciation must invest in this type of mutual fund. Equity mutual funds come under this risk grade.

Investors switching from fixed deposits to mutual fund investment and are comparing between the two should understand that FDs are a low-risk investment; hence it should be compared with the low-risk funds only for better judgment.

What is a debt fund?

A debt fund is a kind of mutual fund scheme which invests in debt market securities or in the money market (to be precise). The best example of debt fund investment includes a certificate of deposits, treasury bills, and commercial papers to name a few. Even you most debt fund belong to the low-risk grade but they are not risk-free. However if given a chance to choose between fixed deposits and debt funds, debt fund is certainly the best investment option as they give superior returns when compared with fixed deposits. There are different types of debt funds with dissimilar risk profiles. The table below illustrates average, medium and highest returns of different categories of debt funds over the last one and three years correspondingly.

Debt mutual fund category	One year return		3-Year annual returns
	Average	Medium	Average	Medium
Liquid Funds	6.1%	6.6%	7.1%	7.6%
Ultra-short term Debt Funds	6.7%	7.1%	7.8%	8.1%
Short Term Debt Funds	00.7%	00.7%	8.6%	8.6%
Credit opportunities funds	8.3%	8.2%	9.5%	9.4%
Fixed Maturity funds (FMPs)	6.9%	6.7%	7.7%	7.7%
Income funds	6.3%	6.6%	9.2%	9.5%
Long-term gilt funds	6.4%	6.2%	10.7%	10.5%

The Bottom Line

In the above table you can see that most categories of debt mutual fund surpassed the last 3 years of fixed deposit returns over a similar period of time. Even in the last one year, debt mutual fund categories including credit opportunity funds, fixed maturity funds, credit opportunities funds did better than fixed deposits. Also, the fund categories which were not able to perform in the last one year did well over the last three years. Earlier in this article, we’ve mentioned that mutual funds are subjected to market risks and those risk and returns go hand in hand with MF investment. It is therefore imperative to choose funds as per your requirements. Make sure your investment profile should have a perfect amalgamation of high and low-risk funds so that you can optimize the level of risk to get the best possible returns on your investment. In case you require any assistance related to mutual fund investment, you can seek the advice of professionals to make the wisest decision at the end.