When it comes to savings, the first thing we often go for are Fixed Deposits as it is most conventional and safe way to save money. Savings in Fixed Deposits is part of general savings tendency of every Indian Household. As having a fixed deposit in bank is a risk free way to invest generally people opt for it. Taking into account the inflation rates it may be possible that one faces losses by investing in fixed deposits. In terms of risk, yes, Fixed Deposits are the safest of all whereas Mutual Funds carry higher market risk but this risk can be mitigated if the investment is done carefully through professionals and by properly studying the market. Some points of comparison between Fixed Deposit and Mutual Funds are noted here.
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The first thing one need to consider is the inflation rates. Inflation has a great deal of influence on savings. Debt mutual fund has the potential of keeping with the pace with inflation rates. The next thing one should consider is the taxation in both the options. Short term fund gains are added to income as they are included in taxable income. The long term gains are taxed at 20% at indexed value. Also the FD income is added to taxable income after deducting some deductible portion out of it.
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The other major difference between FD and Mutual Fund is the rate of return. Where the FD provides return of 7-8% the mutual funds provide much higher return which ranges from 14 to 18% and even more. Also investment in funds provides dividend to the investors. The liquidity in mutual fund is very much high as compared to deposits as for deposits they are having lock in period for withdrawal. Also mutual funds give range of investment options such as Systematic Investment Plan or Lump sum investment whereas in FD only Lump sum investment option is available.
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Also as mentioned above, mutual funds are more liquid than FD. It is possible to withdraw from funds at any given point of time depending on the type of mutual fund but early exit costs loss of interest in fixed deposits. The processing or managing charges are higher in mutual funds investment when on the other hand there are no such charges in deposits.
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Other than the risk factor and management charges the investment in funds do not have any drawback for any investor. It is a time to now upgrade from conventional ways of investment to smarter ways y investing in mutual funds and have wealth maximization.
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In the end, the decision to invest in Fixed Deposit or Mutual Fund based on the risk bearing capacity of individual investor. But if the market condition is great, and there are good prospects for growth of the economy, it is better to invest in mutual funds because of the rate of return as investment in FD does not give any advantage of wealth creation. Also the golden rule of higher the risk, higher the return applies in these investments.