Fixed Deposits vs. Mutual Funds: Which Investment Option Suits You Best?

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Fixed Deposit (FD) accounts and mutual fund investments are among the popular investment options in India currently. Which one should you invest in? Answering this question requires you to understand your investment objectives, risk appetite, and the features of both these instruments.

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Eight questions that you must ask yourself while deciding between FDs and mutual fund schemes

What is my investment objective?

Fixing an investment objective before investing in any scheme helps you make the right investment decisions. Your investment objective can be a one-phrase statement like “I want to save for an upcoming wedding” or “I want to save for my retirement”.

What is my risk appetite?

The risks posed by a fixed deposit vs mutual fund investment can vary greatly. It’s important to understand what level of risk you are capable and willing to take and then align your investments accordingly. Equity mutual fund schemes, for instance, pose a higher risk to the investor when compared to FD accounts. You must thoroughly analyse your risk appetite before opening a fixed deposit account online or starting a SIP (Systematic Investment Plan). Risk appetite depends on factors like the investor’s age, income, debt, number of dependents, personality, and more.

What are my returns-related expectations?

You should have a clear idea of how much you wish to earn from your investment after clearly defining your investment objective in the first step. However, this value might change with an increase in inflation over time. You can know exactly how much to invest in an FD by using an online FD rate calculator like the one on IndusInd Bank’s website. If you wish to invest in a mutual fund scheme, you can use an online mutual fund SIP calculator.

How much liquidity do I need?

FD accounts generally offer higher liquidity compared to certain types of mutual fund schemes, except for tax-saving FDs. You can also invest in a liquid mutual fund scheme if you wish for your investment scheme to offer more liquidity.

What are the tax implications of investing in FDs and mutual funds?

The interest earned from an FD is added to your total income and taxed according to the income tax slab rate applicable to your total income. On the other hand, the taxation of mutual funds depends on the category of mutual fund and the duration for which the investor holds their mutual fund units. You must consider the taxation of both investment options before choosing one.

Am I looking to diversify my investment portfolio?

If you have clearly defined your investment objective in the first step, assessing whether your investment aligns with that objective will become easy. Doing so can help you decide whether or not you wish to diversify your investment portfolio. Mutual fund schemes can help you spread risk across various investments to help mitigate the overall risk on your portfolio.

What should be my ideal investment amount and horizon?

You can use an online mutual fund investment calculator to know your ideal investment amount and horizon. You can also automate the reinvestments of your FD returns in the same FD. IndusInd Bank’s online Fixed Deposit accounts offer the auto-renewal option to help you reinvest your returns and benefit from the power of compounding.

How expensive is the mutual fund investment?

If investing in a mutual fund, you must check the fund’s expense ratio, past performance, NAV (Net Asset Value), and entry/exit load before investing.Fixed deposits usually do not have any such associated costs.

A comparison of the features of fixed deposits vs mutual funds:

Here is a comparison of the key features of fixed deposits and mutual funds:

Feature	Fixed deposits	Mutual funds
Returns	FDs offer fixed returns at a fixed interest rate over time.	The returns offered by mutual funds might vary depending on market conditions.
Risks	FDs generally pose a lower risk to investors.	Mutual funds pose a medium-to-high risk to investors.
Expenses	Investors can open an online FD without bearing any charges in the initial stages.	Mutual funds charge an expense ratio to the investor for fund management services.
Liquidity	FDs allow investors to prematurely withdraw their invested income, though they may charge a penalty. Tax-saving FDs are an exception as they have a fixed five-year lock-in period.	Investors can withdraw their mutual fund investments for free after a certain period.

To sum up

To decide which of the two options – mutual funds or FDs – suits you best, you must fix an investment objective, analyse your risk appetite, and be clear about your returns-related expectations. You should take into consideration the liquidity offered by both investments and the tax implications of each. You can also use an online calculator like an FD interest rate calculator to know your ideal investment amount and horizon and consider the expenses of both investment options.