For years, investors have reposed faith in fixed deposits (FDs). It has remained the most trusted investment instrument for them. The reasons are simple — it's convenient to manage, risk-free and, most importantly, many don't want to experiment just as yet. However, with debt mutual funds emerging as an alternative, many investors are making a transition towards it. But which one is better than the other is a question that can't be answered without taking a deep dive into some of the major factors that influence an investor's decision to opt for one over the other. And one might think that returns are the only defining factor, that's not the case.
Here's a look at 5 factors to help you make a better call on your investment:
One of the primary reasons why many investors opt for FDs over other investments is because they are nearly risk-fee. You get your principal amount as well the interest upon maturity. Bank may default on your FDs only in case of high NPAs. But even then, the possibilities are that you will get your principal amount and interest back. When it comes to debt mutual funds, they are subject to market risks and there is no assurance of capital safety and that becomes the underlying difference between the two. Anyone investing should take into consideration the risk factor and invest accordingly.
It's always on your mind, right? It's got to be, for we invest to ensure we get the bigger and better returns. FDs offer you a fixed interest rate over the total tenure of the investment. Mutual funds do not give you assured returns, for they are directly linked to the market. Data show that debt mutual funds, for a similar duration, have outperformed FDs in terms of returns, but never forget that the market dictates everything in this instrument of investment.
Gains on fixed deposits, irrespective of their tenure, are taxable as per your slabs. However, senior citizens can avail of deductions on the interest of up to Rs 50,000 in a financial year. On the other hand, short-term gains, meaning for anything under 3 years, on debt mutual funds are taxable according to your tax slab, but long-term gains are at 20 per cent with the benefit of indexation.
First, both are highly liquid but since mutual funds can be redeemed at any time, they can be considered more liquid. But their redemption under the exit load period entails charges. Once through that period, units can be redeemed without any charges. For FD, some banks may charge for premature withdrawal.
If there's one thing that can really prove to be a spoilsport for your savings, it is inflation. But mutual funds, with greater risk, do also have the potential to keep pace with inflation, experts say. For example, if an investment in FD accrues you an interest of 6 per cent, but the inflation rate is 5 per cent, the final return comes down to 1 per cent. Debt mutual funds, on the other hand, may deliver better returns.