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.

Growth vs. Dividend Option in Mutual Fund

Mutual Funds (MF) are one of the safest investment options that promise good returns for the investor. However while making an investment in mutual funds, an investor has to make endless choices, amongst which are choosing between a growth option and a dividend reinvestment option; this choice is the trickiest. Both options have their own set of benefits and drawbacks and deciding which one is better depends on one’s personal needs and requirements. 

What is the Growth option?

By choosing the growth option in the mutual fund, an investor will not get the dividends that are remunerated by the stocks of the mutual fund. Instead, the amount paid to the investor as the dividend is further reinvested. This increases the net asset value (NAV) of the mutual fund. The growth option in the mutual fund is good for investors who do not want regular earnings from their MF investments. Also, it is a sure shot way to maximize the fund’s NAV and realize a higher capital gain, on the same number of shares that he/she originally invested in, at the time of selling mutual funds. In the growth option, the fund holders don’t get more shares; instead his/her shares of the funds increase in value.

What is Mutual Fund dividend?

The dividend reinvestment option in mutual funds is quite different from the growth option. Here the dividend is paid to the investor so that he/she can purchase more shares. Still the payment is not made to the investor; instead, the cash is routinely transferred to the fund managers who buy more funds on behalf of the investor and transfer funds to their mutual fund account. The fund's holders, in this case, realize the capital gain at the time of sale of the units of the funds. Unlike the growth option, investors will gradually have more fund in dividend option than they have started with.

       

The Comparison

The dividend reinvestment option is suitable when the market is high as this is the time when you are more likely to get good returns. Mutual fund dividend is also the safest option for those who want to get regular cash from their investment. This means stay-at-home-parents; retired individuals should pitch for a dividend option. 

The growth option in mutual funds, however, is ideal if you have a steady income and you are not dependent on your investment for money. Here the results are compounded and tend to get higher at the time of maturity. In mutual fund growth option, if you continue to invest for more than one year, your investment will be tax-free. Otherwise, you will have to pay short-term capital gain tax. In dividend option, no such tax has to be paid by the investor. Here fund houses pay the dividend distribution tax.

Conclusion

Concluding the above topic, it can be stated that no mutual fund is perfect for all categories of investors. Thus to determine the most suitable option, you must give consideration to three factors - Cash requirement, Time Frame, and Tax efficiency. In addition to this, you must also do a thorough research on the list of advantages and disadvantages associated with each fund type. 

A mutual fund investment is one of the safest investment options. It is a far better investment alternative than hoarding your money in the savings account. With mutual fund investment, you can not only keep your money safe but also earn good returns, more than a savings account would ever give. One rule of thumb, the more money you’ll invest the more returns you are likely to get on your investment. Also, the time period pays a vital role in mutual funds investment. Investors who invest for a longer tenure are more likely to get high returns and many tax benefits than those who invest for a short period of time.

Opening a Demat Account To Invest in Mutual Funds

Mutual fund (MF) has become one of the choicest investment options these days owing to the affordability, high returns, and easy options to liquidate. However, there are many people who are still perplexed about the concept of MF. To help such individuals, here’s a detailed view into the world of mutual funds:

What is Mutual Fund? 

A mutual fund is a type of online investment wherein the money from several investors is collected and further invested in different funds that fit your financial goals. The primary advantage of investing in the mutual fund is that you can start investing in MF from Rs 500 and go higher gradually. The second thing that woos more customers towards MF is that there are fund managers who invest your money accordingly, so you need not worry about anything, just sit back and watch your investments grow with time. 

Is it important to open a Demat account to invest in mutual funds? 

It is not mandatory to open a Demat account to invest in mutual funds. Instead one can invest in mutual funds online with the help of three lucrative ways:-

1. Through Asset Management Company (AMC) Websites: There are many companies which allow individuals to invest in mutual funds online. For this, you need to first visit the particular website, download and fill up the scheme form from the website and submit it with the required documents such as PAN card, KYC letter. In addition to this, you must also apply for the personal identification number (PIN) to instigate easy transactions online. Once you receive the folio number along with the PIN, you can easily do other transactions in the folio with the help of your bank account. If you want to invest in other types of funds, you need to repeat the same method again. This is one of the easiest ways to invest in MF and this service comes absolutely free of cost.

2. Via Brokers Online: There are a number of online brokers associated with the mutual fund's exchange platforms. Amongst several brokers, there are few big-scale brokers who are associated with the NSE or BSE, the most popular MF exchange website. To begin with, all you need to do is to visit the online trading platform of the particular broker, select the scheme you want to invest in. The extent of your ownership will be directly credited to your Demat account. In case you do not have a Demat account, you can go for a SIP and invest the amount. The charges associated with this process are not too expensive and vary from one broker to the other. 

3. Independent Online Portals: Some independent online platforms are also available where investors can buy and sell MFs at no added expenditure. To start investing with this method, you simply have to sign up on any of these platforms, fill the form available on the website, take a printout of this pre-filled form, sign it, and send the form with the attached copy of PAN card and KYC acknowledgment letter. Upon completing this process, you can purchase MFs from various fund houses. These portals are in partnership with the top-notch banks across the country for superior online payments service. Apart from offering the service at no additional cost, these portals also work hard to provide an affable, pleasant experience to the investors. On top of it, these portals also help you keep a close eye on your funds and provide an appropriate research and testing platform to help investors build an ideal MF portfolio.

So now that you know the right ways to invest in MF, you may initiate your research and start investing!

The Advantages of Mutual Funds

Mutual funds are a popular investment option available in India and they have been growing more and more popular as compared to traditional investment routes such as bank fixed deposits, PPF, VPF, EPF etc. In recent times, the old school investment options have witnessed a fall in ROI, which makes them less lucrative and this seems to be one of the prime reasons why interest in mutual funds has grown significantly in the past couple of years.

Some of the popular mutual fund AMC currently operating in India include SBI Mutual Fund, DSP BlackRock Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund, Reliance Mutual Fund and others. The following are some of the key advantages of investing in mutual funds:

Diversified Portfolio

In case of share trading, an individual investor is limited by the funds at his/her disposal, this limitation is not applicable to mutual funds. Mutual funds, as a rule, have a much larger pool of capital as there are multiple investors are contributing into the scheme simultaneously. With this substantially larger pool of capital available at the disposal of the mutual fund management team, they can significantly increase the diversity of their holdings irrespective of market capitalization or sector in which the fund is invested. For example, the equity mutual fund from UTI Mutual Fund includes investments in multiple companies including TCS, HDFC Bank, Gujarat Petronet, Sun Pharmaceuticals, Tech Mahindra, Maruti Suzuki India and others to ensure a diverse portfolio. Similarly, Axis Long Term Equity Fund is invested in various companies including TTK Prestige, HDFC, Kotak Mahindra, Cummins India, Motherson Sumi, Nestlé India etc.

Professional Management

The pool of money available to a mutual fund is managed by a professional funds manager supported by a fund management team. The fund managers as well as the team are carefully chosen individuals who have key skills and industry experience to help choose the ideal investments to improve the chances of the fund meeting its investment objectives. In case of individual investors, such experience as well as knowledge of how markets work is difficult to come by, hence mutual fund investments are a suitable choice for novice as well as the experienced investors.

Market Linked Returns

In the present scenario, interest rates are being slashed for loans as well as traditional investment avenues such as PPF, EPF, VPF, bank fixed deposits, post office term deposits, etc. This is mainly due to implementation of the MCLR regime across the country. However, this situation does present a significant downside – the majority of these traditional investment avenues are unable to keep pace with the inflation in the economy. This is completely contrary to the way a market-linked mutual fund work. As a result, mutual fund investments are capable of providing much higher returns that are better able to keep pace with the inflation as compared to the traditional investment options mentioned above.

Transparency in Investments

Investments made into mutual funds feature detailed listing of all the holdings of the fund and the details of the portfolio can be checked by the investor at any period of time and any time of the day. This detailed report is available not just from the AMC but also from a variety of third parties such as Value Research and MoneyControl. This further ensures the transparency in dealings whether you are invested with DSP BlackRock Mutual Fund, Reliance Mutual Fund, UTI Mutual Fund, Mahindra Mutual Fund or any other AMC operating in India. The same holds true for valuations, the net asset value (NAV) of mutual funds changes every day the stock market operates and the investor can easily get a valuation of his/her holdings on a daily basis from the AMC. The availability of such transparency ensures that the investor is able to make an informed decision regarding buying, redeeming or switching his/her current investment in order to maximize the ROI.