FD vs Mutual Funds: Key differences between MF and FD

It is difficult to choose between mutual funds and FDs, as both investment instruments can deliver decent returns and help build a wealth corpus

Investors today are spoilt for choice. They can choose from many different investment instruments, with each offering the chance to build wealth. Still, mutual funds and fixed deposits (FDs) remain more attractive than the other assets. They carry comparatively less risk and can give investors consistent returns in the long term.

While it is best to invest equal sums in mutual funds and FDs, investors may go overweight in either of the two asset classes. This guide can help you choose between FDs vs mutual funds.

FD vs Mutual Fund: Key Differences

Some of the points of difference between the two are:

Returns

Individuals can get predefined fixed deposit interest rates for a set time frame. It indicates that any money put into a fixed deposit will only earn a particular amount of interest over a set period. Mutual fund investors have an edge as their investments are reliant on the performance of the underlying asset. They might earn higher returns if the underlying asset performs well.

Risk profile

Fixed deposits are virtually risk-free investments since investors know exactly how much money they will receive. Fixed deposit rates do not fluctuate, and market volatility does not affect them. Investors can expect a consistent return on their money. Some mutual funds are subject to market fluctuations, even though the risk is dispersed among several components inside the fund. As a result, an investor could profit more if financial conditions are conducive.

Charges

Investing in mutual funds incurs charges in the shape of management fees paid to fund managers, who handle an investor's investments. Individuals who invest in fixed deposits can save these costs because no intermediaries are necessary to manage the investment process. However, the same cannot be said about corporate fixed deposits.

Early withdrawal

Individuals who intend to make an early withdrawal from their fixed deposits will almost certainly have to pay a fine. Also, investors would also lose a percentage of any anticipated profits. Premature withdrawals from mutual funds are permissible until the statutory holding time has been met. However, an exit load will be charged if a withdrawal is made before the holding period has expired.

Applicable taxes

Short-term capital investments and hybrid funds are considered short-term investments if the holding duration is less than 12 months, and long-term if the holding period is more than 12 months. A holding duration of less than 36 months in debt funds indicates that they are short term, whilst a lock-in period of 36 months or more shows that they are long term. Long-term capital gains on equities and hybrid mutual funds worth more than ₹1 lakh would be taxed at 10%. However, short-term investment income will be taxed at 15%. Any interest earned on a fixed deposit is taxed depending on the tax bracket investors fall into.

Once you have made your decision, you can invest in mutual funds or FDs at IDFC FIRST Bank. With appealing fixed deposit features such as competitive interest rates, and the option to invest in any type of mutual fund, IDFC FIRST Bank’s banking app and website portal make it easy for you to begin your investing journey.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.