Gaining an edge: Fixed Deposits versus Mutual Funds

Mutual funds have gained an edge over fixed deposits (FDs), these were the findings of a recent survey.

Mutual funds and FDs are both tax-saving investments. However, there are differences between the two instruments.

Here’s the lowdown on a few of the factors that differentiate mutual funds from FDs.

The returns on FDs are pre-specified and remain unchanged throughout the tenure. Mutual funds are linked to the financial market and are known to offer a comparatively better return on long-term investments. 

The interest rate on FDs is fixed depending on their type or the period. The returns on mutual funds vary as various types of funds offer volatile returns. When the equity market goes up, the returns tend to surge and vice-versa. 

FDs do not pose any risk as the returns are pre-determined. Mutual funds comparatively carry a higher risk considering they invest their assets in the financial market.

FDs remain insulated from inflation considering the interest rates are pre-decided. In the case of mutual funds, the returns are inflation-adjusted. This enhances the potential of mutual funds to earn better returns.

When it comes to capital gains, it is not possible in the case of FDs. Capital gains in the case of mutual funds are proportional to the holding period. 

The amount in an FD is locked for a certain period. It invites a penalty in case the money is withdrawn before this specific period. Mutual funds are relatively liquid as an asset class.  

The interest on FD is taxed as per the tax slab of the investor. Taxation in the case of the mutual fund is proportional to the holding period.