Fixed deposits (FDs) are a favourite investment tool for many people. With its no-risk factor and a guaranteed return, individuals prefer fixed deposits for the short-term solution. Over the past few years, interest rates on fixed deposits have decreased; and individuals are looking for other options to hold their money and maximize their wealth.
This is where mutual funds are taken into consideration. Liquid fund is a popular category of mutual funds, which offers a better return than fixed deposits. These are handled by professional fund managers who work to diversify your portfolio and reduce risk. They invest in equity and debt to consistently choose funds that are performing well.
Read more: Explained: What Are Liquid Mutual Funds?
Liquid Funds Vs Fixed Deposits
A brief comparison of both liquid funds and mutual funds will allow investors to make the right choice. Here are some of the many factors that may help you in your decision making:
- Risk Factor
- Funds Availability
- Return
- Liquidity
- Taxation
Now let us understand how all of these parameters are different for liquid mutual funds and fixed deposit:
Risk
One of the essential factors when investing your money is the risk factor. FDs are taken as no-risk investments, where on the other hand investing in mutual funds has a certain amount of risk in terms of change in market trend.
Funds Availability
A lump sum amount should be done when dealing with FDs, whereas, in mutual funds, the investor allows a set up of a systematic investment plan (SIP) where one can invest a certain amount each month. This will not only build financial discipline but will also diversify the risk involved in the portfolio.
Read more: A Beginner's Guide to Investing In Mutual Funds
Returns
Fixed deposits carry a predefined rate of return, which does not fluctuate during the entire clock of investment. Higher the period, more the rate of interest. For a lower period, the interest rate is also typical. Mutual fund returns are never based on a fixed rate of return. The return on investment is generated by the ups and downs in the market. Equity mutual funds are also known to carry a higher level of risk, value while debt funds have lower risks.
Liquidity
Fixed deposits deal in a fixed tenure. It carries very low liquidity with itself until the end of the time. In other words, if you break off your Fixed Deposit before its maturity date, a penalty will be charged to you, and you may have to leave some part of your earnings. However, after the tenure, the entire principal amount additional the interest earned will be credited to your current or savings account within an hour. On the other hand, mutual funds returns can be redeemed at any point in time with an exit load.
Taxation
One major factor why investors weigh the investment options is taxation treatment. In Fixed Deposits, the tax is stated as per the recent tax slab of the investor. While, in liquid funds, the dividend income received is tax-free. The result of gain or loss on mutual funds depends highly on the type of fund. For instance, for equity funds, the short-term capital gain is taxable at 15%, while the long-term growth is tax-free. In the case of debt funds, short-term capital gains are taxed according to the income earned by the investor, while in the long-term, the capital gain is taxed at 20% with indexation and 10% without indexation.
Considering the various pros and cons of both investment options, we might conclude that mutual funds are comparatively better investments than FDs. If an investor has a high-risk appetite and generally prefers to invest for a longer tenure, investing in mutual funds will benefit a higher return. FDs will do the work for individuals who are not yet ready to take any risk and only seek a specific return.
However, if you still think you need more learning and preparing yourself before you dive into investment tools like short-term liquid funds, read more and educate yourself with the available guides on WizeUp.
(Check out 'Learn & Grow with Wizely' 'to read and learn all about the mutual funds.)
You can also try a Fixed Deposit Calculator to calculate the investment return and Fixed Deposit rate of return on your investment to know your maturity amount.
