5 min read • Published 10 Jan 25
FD vs. Mutual Funds: Which One to Choose?
Table of Contents
FD vs. Mutual Funds: Which One to Choose?
The most common myth about investing and financial management is that investors think they should have the financial literacy to start their investing journey. But less do they know about such investment, which proves this myth wrong, helping millions of investors in India with investing.
One such investment is Fixed Deposits (FD) and mutual funds. Both of these do not ask much from investors. All it asks for is a disciplined investment habit to create long-term wealth.
Fixed deposits are known as the traditional investment of every household, which allows investors to earn a safe and guaranteed interest.
The mutual funds industry has seen tremendous growth between November FY23 and November FY24, becoming a priority investment for many. Investors like the flexibility and liquidity that mutual funds offer.
Though these investments don’t require investors to dive into nuances, still understanding the basics of it will help to keep a check on them regularly. This blog will help investors understand the differences between FDs and mutual funds before starting their investments.
What are Fixed Deposits?
FDs are the best investment option for investors who want to play safe with regular guaranteed returns.
Today, it is experiencing a decline from 28% of investments in 2020 to 23% in 2024 due to more awareness among investors as they look for investments that give higher returns.
Investors can invest a specific amount in FD and expect to earn little interest in return. Various Indian banks offer FD plans, and investors can choose from different types of FDs, which will be covered in this blog.
How to calculate interest from fixed deposits?
Investors can calculate the returns with simple interest and compound interest formulas.
If the plan is to invest ₹14,000 for 1 year with a 7% rate of interest, the simple interest would be ₹980. The investors will get ₹980 as interest at regular intervals.
Investors have to know a few things before investing in FDs:
1. The interest can be obtained as per the investor’s choice. Investors can get that ₹980 at any interval they prefer.
2. There’s an option for premature withdrawal, which might include a penalty.
What are Mutual Funds?
Mutual funds collect a pool of money from various investors and invest in various securities in the market, like bonds, stocks, and debentures. Investors can invest in the form of an SIP (systematic investment plan) or with a lump-sum amount.
The mutual funds industry has grown by 39.59% (₹48.75 trillion to ₹68.05 trillion between November FY23 and November FY24).
If investors want financial experts to manage their money, then the mutual fund is the one to go for.
Just like FDs, there are different types of mutual funds for investors to choose from according to their goals and investment period.
How to Calculate Returns from Mutual Funds?
Mutual fund returns come from capital appreciation and dividend distribution.
If an investor plans to invest ₹15000 with an initial NAV of ₹90 per unit and buy 100 units. After a year, the NAV increases to 110.
The profit would be (110-90)*100= ₹2000
The investor will get a return of (₹2000/₹15000)/100%=13.3%
Factors to understand before choosing mutual funds:
1. Mutual funds contain market risks and do not guarantee fixed returns.
2. They carry a few charges to be paid by the investors, such as exit loads and brokerage commissions.
Types of Fixed Deposits
Every investor might have different goals and timelines according to which they invest. So, here are a few types of FD plans from which investors can see which one suits them the best.
Standard Fixed Deposits
These are common types of FDs, and tenure is between 7 days to 10 years. If investors want a basic FD plan without any specifications, they can choose this.
Tax Saving Fixed Deposit
This FD plan will help investors save up to 1.5 lakh per year.
Senior Citizen Fixed Deposit
Investing can start at any age. This FD plan makes it possible for people above 60 years old to start their financial journey. The best part is that investors will get additional interest of around 0.50%.
Types of Mutual Funds
Like FDs, mutual funds also come in various categories. Those are very specific and can cater to different types of investors.
The categorisation happens in three ways-
1. Structure-Based Mutual Funds
This type decides how many units can be bought by the investors. It also underlines the specific timeline to sell the units.
Open-ended funds: The withdrawal option is flexible here. Investors can come off the investment any time they prefer.
Close-ended funds: It is only during the NFO that the units can be purchased. Investors have to wait till a specific date to sell them.
Interval funds: It is a combination of both open-ended and closed-ended funds.
2. Based on Asset Classes
Investors can go for mutual funds as per the securities they want to invest in. Some invest only in equity, some invest in debt or bonds, and some invest in a combination of everything. Those are called hybrid mutual funds. An investor can choose according to their risk levels.
3. Goal Based Mutual Funds
This type will offer investors various options on how they want their returns to be.
- Growth funds: The returns will grow through long-term capital appreciation.
- Liquid Funds: Investors can liquidate their investment anytime they want their money.
- Tax-Saving Funds: If the investment is for the long term, then the returns will be higher, and so will the taxation. This type of fund will save and provide tax exemptions.
Key Differences between FD and Mutual Funds
Both investments have unique approaches to investing and offering returns. It’s better to understand these 4 basic differences between them.
| Basis of Difference | Fixed Deposit | Mutual Funds |
| Risk & Return | FD offers a fixed return, guaranteed at regular intervals. | Returns from mutual funds might fluctuate as per the market performance. The risk is higher in mutual funds compared to FDs. |
| Liquidity | With fixed returns, FDs have fixed investment tenure. Investors might have to pay penalties if they withdraw it before maturity. | Mutual funds offer flexibility to investors, allowing them to withdraw whenever they need the funds. |
| Professional Management | FDs don’t need active management. Once the fund is deposited, it grows with the fixed interest rate till maturity. | Mutual funds will have fund managers to manage the diversified portfolio of securities. |
| Taxation | The tax on FDs falls as per the income tax slab. | In mutual funds, long-term capital gains tax is usually lower than the income tax rate. It will be tax-efficient in the long run. |
FD vs. Mutual Funds: How to choose?
If the investors want to play safe with fixed returns for a fixed tenure, then FD is the best option. On the other hand, if investors are willing to take risks for higher returns, then mutual funds offer flexibility.
Investors can also try both of them for a diversified portfolio.
Conclusion
There are different types of FDs and mutual funds. FDs will need a one-time lump sum investment, while mutual funds will need either a lump sum or a regular monthly investment. Investing consistently and monitoring the growth will help investors maximise the returns from mutual funds. Whether it is FD or mutual funds, the investing journey should continue consistently for a better financial future.
FAQs on FD vs. Mutual Funds
- What is the minimum investment amount for a Mutual Fund?
The minimum investment amount for a mutual fund can vary depending on the fund house and the specific scheme. Some funds have a minimum investment of as low as Rs. 100, while others may require a higher initial investment
- How are taxes calculated on returns from FDs and Mutual Funds?
Interest earned on FDs is taxable as per the income tax slab of investors. Long-term capital gains both equity mutual funds and non-equity funds are taxed at 12.5%.
Short-term capital gains are taxed differently based on the fund type (equity, debt, hybrid) and holding period, with equity funds taxed at 15% and debt/debt-oriented hybrid funds taxed as per the investor’s income tax slab.
- How to calculate returns from a Mutual Fund investment?
To calculate returns from a mutual fund investment, investors can use the following formula:
Return = (Current NAV – Purchase NAV) / Purchase NAV * 100
Investors can also use online tools and calculators to calculate returns.
- What are the expenses associated with Mutual Fund investments?
Mutual funds charge various fees, including expense ratio, exit load, and brokerage fees. The expense ratio is an annual fee charged by the fund house to manage the fund.
- How to choose the right FD interest rate?
To choose the right FD interest rate, investors can compare interest rates offered by different banks and financial institutions. Consider factors like tenure, deposit amount, and any special offers.
