Fixed Deposits Vs Mutual Funds: Making The Right Investment Choice
When it comes to investing, there are various options available in the market. However, two of the most popular investment options are fixed deposits and mutual funds. Fixed deposits are a type of investment that allows you to deposit a lump sum amount of money with a bank or financial institution for a fixed period of time, and in return, you receive a fixed rate of interest. On the other hand, mutual funds are a type of investment that pools money from various investors and invests it in a diversified portfolio of stocks, bonds, or other securities.
So between fixed deposits and mutual funds which is better - both have their own set of advantages and disadvantages, and choosing the right investment option depends on your financial goals, risk appetite, and investment horizon. Knowing the difference between FD and mutual funds will help you understand which one is the right investment choice for you.
Return on investment
One of the primary factors that investors consider while choosing an investment option is the return on investment. Fixed deposits offer a fixed rate of interest, which is generally lower than the returns offered by mutual funds. However, fixed deposits provide guaranteed returns, and the risk of losing your principal amount is minimal. Mutual funds, on the other hand, are subject to market risks, and the returns on investment are not guaranteed. However, if you invest in a mutual fund with a good track record and a long-term investment horizon, the returns can be higher than fixed deposits.
Unity Bank fixed deposits offer an attractive interest rates under its Shagun Deposit scheme to its customers. The highest interest rates are for tenures of 181-201 days, 501 days and 1001 days respectively. In fact, for 1001 days, the interest rates* go up as high as 9.00% for general customers and 9.5% for senior citizens.
Liquidity
Fixed deposits come with a fixed lock-in period, which means you cannot withdraw your money before the maturity date without incurring a penalty. This makes fixed deposits less liquid as compared to mutual funds, which offer higher liquidity. Mutual funds allow investors to redeem their units at any time, and the money is credited to their bank account within a few days.
Risk
Fixed deposits are a low-risk investment option, as the principal amount is guaranteed, and the returns are fixed. All Unity Bank fixed deposits are insured up to Rs. 5 lacs by Deposit Insurance and Credit Guarantee Corporation (DICGC) to safeguard your deposits. On the other hand, mutual funds are subject to market risks, and the returns on investment are not guaranteed. However, mutual funds offer higher potential returns as compared to fixed deposits, which makes them a higher risk investment option.
Investment horizon
Fixed deposits are ideal for short-term investment horizons, as they offer guaranteed returns and are less volatile. Mutual funds, on the other hand, are suitable for long-term investment horizons, as they have the potential to provide higher returns, and the impact of market volatility is reduced over the long-term.
Tax implications
Fixed deposits are subject to TDS (Tax Deducted at Source) if the interest income exceeds a certain threshold. The interest income is added to your taxable income and taxed according to your income tax slab. Mutual funds, on the other hand, are subject to capital gains tax, which is taxed based on the holding period of the investment. If you hold the investment for more than one year, you are eligible for long-term capital gains tax, which is lower than short-term capital gains tax.
In conclusion, the right investment choice depends on your financial goals, risk appetite, and investment horizon. If you are looking for a low-risk investment option with guaranteed returns and a short-term investment horizon, fixed deposits are the ideal choice. However, if you are willing to take market risks and have a long-term investment horizon, mutual funds offer higher potential returns. It is always advisable to consult a financial advisor before making any investment decision, as they can help you choose the right investment option based on your financial goals and risk appetite.
*Interest rates are subject to change