Wise investment is essential for financial security and wealth accumulation. Two of India’s most popular investment plans are Mutual funds investment plans and Fixed deposit plans. Both of them fulfil various financial needs and risk tolerance levels. Mutual funds have room for better returns but with the risk of the market. Fixed deposits offer fixed returns and security but may sometimes fall behind inflation. This post compares the primary differences, advantages, and things to keep in mind while investing between these investment instruments.
Mutual Funds Investment Plans
Mutual fund investment schemes collect funds from a group of investors and invest in a diversified portfolio of stocks, bonds, or other securities. The fund managers handle the money professionally to maximise returns based on the fund’s investment approach and current market trends.
Types of Mutual Funds
Mutual funds are divided based on their investment pattern and asset base:
– Equity Funds: Invest in equities with a view to long-term capital growth.
– Debt Funds: Invest in fixed-income instruments like government securities and corporate bonds with the objective of earning a regular income.
– Hybrid Funds: Blend equity and debt to balance risk and return.
– Index Funds: Automatically track a target market index with diversification at a reduced cost.
– ULIPs (Unit-Linked Insurance Plans): Insurance cum investment where money is invested in market-linked products.
– Retirement Funds: Long-term saving of money with a particular emphasis on the security of returns and protection of capital.
Mutual Fund Investment Plan: Advantages
Mutual funds have several advantages that make it a suitable investment option for different types of investors.
1. Enhanced Return Opportunities – Equities-based mutual funds always return more than any other investment scheme.
2. Diversification – Investment in different asset classes reduces risk and volatility.
3. Liquidity – Open-ended schemes are redeemable at any given moment, offering ready access to money.
4. Tax Benefit: ELSS mutual funds are tax-exempted under Section 80C.
5. Professional Management – Professional fund managers make investment decisions, which is beneficial for first-time players in the market.
6. Systematic Investment Plan (SIP) – Small periodic amounts can be invested in a disciplined fashion rather than lump sum.
Mutual Fund Investment Plan: Limitations
Though mutual funds have numerous advantages, there are certain limitations associated with them that the investor must be aware of.
– Market Volatility – Returns vary with market conditions, and there is no guarantee of capital.
– Expense Ratios – Fund management charges can cut down overall returns.
– Lock-in Periods – A few funds, like ELSS, have lock-in periods.
– Redemption Delays – Mutual funds will not take as long as fixed deposits to give back money; they will take 2-3 business days.
Fixed Deposits Plans
A fixed deposit plan is an ancient investment product where some amount of money is tied into the bank or a financial entity for a tenured period with an agreed upon rate of interest. Fixed deposits are highly popular among risk-averse investors because they like their safety and don’t want excessive volatility in return.
Types of Fixed Deposits
Fixed deposits are offered in various forms to suit various investor interests and requirements.
– Bank Fixed Deposits (FDs): These are received by banks at different interest rates and durations.
– Company Fixed Deposits: Pay by NBFCs and corporates, which are typically higher in interest compared to bank FDs.
– Tax-Saving Fixed Deposits: They are 5-year locked-in deposits and are tax-deductible under Section 80C.
– Senior Citizen FDs: Offer higher interest rates for senior citizens.
– Recurring Deposits: Offer fixed investment in units at fixed intervals as opposed to a single lump amount.
Benefits of Fixed Deposits Plans
The benefits of fixed deposit plans are:
1. Guaranteed Returns – The interest rate is predetermined, and thus the returns are assured.
2. Safety & Stability – Investment in safer banks is a safe investment.
3. Flexible Tenure – Investors are allowed a few months to several years.
4. Loan Against Fixed Deposit – Investors are allowed to take loans against the collateral of FDs.
5. No Market Risk – The interest is never exposed to market risks.
6. Easy Renewals & Auto-Rollovers – Auto-renewal facilities are provided by most banks; therefore, reinvestment is easy.
Disadvantages of Fixed Deposits Plans
The drawbacks of Fixed Deposits Plans are:
– Reduced Returns – The returns can be less than inflation, and hence, the buying power is eroded.
– Difficulty in Liquidation – Early withdrawal incurs a penalty.
– Tax Implications – Income on interest received is tax deductible in the slab of the investor.
– No Creation of Wealth – Unlike mutual funds, FDs do not grow capital over time.
Comparison of Mutual Funds Investment Plans & Fixed Deposits Plans
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Feature
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Mutual Funds Investment Plans
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Fixed Deposits Plan
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Risk
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High (Equity), Low (Debt)
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Low
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Returns
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Market-linked, possibility of higher gains
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Fixed, lower than mutual funds
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Liquidity
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Open-ended funds are very liquid
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Limited penalty on withdrawal at short notice
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Tax Benefits
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ELSS schemes are eligible under 80C
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Tax-saving Fixed Deposits are eligible under 80C
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Investment Tenure
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Freedom to choose duration
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Duration fixed, either 7 days to 10 years
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Management
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Managed professionally
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Self-managed
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Inflation Effect
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Generally beats inflation
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Does not always beat inflation
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Which Investment Option is Better for You?
Selecting investment plans of mutual funds and fixed deposits is based on several aspects like risk tolerance, investment horizon, and financial objectives:
1. For Conventional Investors – If stable returns and safety are the most important thing, FDs are the best option.
2. For Long-Term Growth – Mutual funds, especially equity funds, should be chosen by investors who are looking for capital appreciation.
3. For Tax-Saving – ELSS mutual funds and tax-saving FDs both have advantages under Section 80C.
4. For Emergency Liquidity – Open-ended mutual funds provide more convenient withdrawals than fixed deposits.
5. To Beat Inflation – Mutual funds tend to offer returns higher than inflation, while FDs are not guaranteed.
6. To Plan for Retirement – A combination of debt mutual funds and fixed deposits can provide security as well as growth.
A balanced investment plan may comprise both FDs for stability and mutual funds for growth, giving a diversified and secure portfolio. When buying an investment tool, ensure to choose a reputable provider like Axis Max Life Insurance.
Conclusion
Both fixed deposit plans and mutual funds investment plans have distinct advantages and serve different financial requirements. Fixed deposits ensure assured returns and safety, whereas mutual funds have the potential to generate more wealth in the long run. Investors need to evaluate their financial objectives, risk appetite, and time frame carefully before deciding on an investment option.
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