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Your grandparents and perhaps also your parents would have definitely opened a Fixed Deposit (FD) in their lives. These traditional investment options are irreplaceable for most old investors. Sure, they provide you with the safety of capital, but is that enough? FD’s do not offer substantial returns; these returns often fail to beat the inflation. This called for another investment option that not only offered inflation-beating returns but also helped to generate wealth in the long run. Enter mutual funds. 

The question lies now – should you go ahead with the traditional form of investing or upgrade to newer investment options? Should you invest in mutual funds or FD? Read on to know more. 

What is a fixed deposit?

This is a financial instrument offered by several banks and NBFCs (non-banking financial companies) that allows investors to park a lumpsum amount for a fixed duration at pre-determined rate of interest. The returns on FDs are slightly higher than that on savings account but significantly lower than that on stocks or mutual funds. As the interest rates on these investments are pre-determined by the Government of India, they are relatively safer as they are backed by the government. However, do note that even FDs have an element of credit risk associated with these investment options. 

What is a mutual fund?

Mutual funds are financial vehicles wherein a fund house or an AMC (asset management company) pools the funds of several investors and invests it in various securities. Examples of these securities include money market instruments, debt, equities, real estate, gold, cash and cash equivalents, etc. This pooled fund is professionally managed by a mutual fund expert known as the fund manager. Depending on your financial objectives, risk appetite, investment horizon, etc, there are various types of mutual funds to cater to your needs. Primarily, you can either preserve wealth, grow your wealth, or save tax on your investments through mutual funds. 

Mutual funds vs Fixed deposits

Let’s understand the key differences between these two types of investment:

Mutual fundsFixed deposits
ReturnsReturns are dependent on the type of mutual fund you invest in and are market-linkedReturns are fixed and are not dependent on market fluctuations
RiskSubstantially higher than FD as apart from credit risk, there’s also the element of market riskThough FD’s are relatively safer than mutual funds as they are backed by the government, they have credit risk
Investment modeSIP or lumpsumOnly lumpsum
WithdrawalIf you have invested in open-ended funds, you can withdraw anytime you wish except if you invest in ELSS funds that have a lock-in period of 3 yearsInvestment duration is fixed. Premature withdrawal may result in penalty. 

There’s no doubt that investments in bank FD are relatively quite safer than mutual fund investments. However, the cost of this safety is significant as the returns earned on FDs are abysmally lower than that on mutual funds. So, consider your risk-return ratio and keeping that and your financial goals in mind, choose the one better suited for your portfolio. Happy investing!