Mutual Fund or Fixed Deposits: Which One Is Better To Invest Your Income?

Fixed income instruments such as FDs whether in Bank or Post Offices have been the preferred method of investing for the majority of Indians. Better returns sound less appealing than knowing that "my money is secure in the bank." However, this is at a time when post-tax FD returns are barely above inflation.

Although, when it comes to generating consistent income, bank deposits have long been one of the most popular investment alternatives. Aside from the safety element, one of the major advantages of bank savings is the guaranteed income. But does this make FDs more efficient than Mutual funds? Let's explore!

Returns

Bank FDs provide the certainty of guaranteed returns, as well as the knowledge of how much you would get as a return amount at the time of investment. Different banks offers different rates of return on investment for various time periods. That instance, if you put a given amount of money in a Bank FD for three months, the interest rate will be lower than if you invest it for a year. The bank, on the other hand, promises to pay the interest rate it committed to pay throughout the period the money was invested.

Meanwhile, there is no guarantee of guaranteed returns in the case of mutual funds, and the return amount may fluctuate depending on market conditions. That isn't to say that the returns will always be bad. In reality, compared to FD returns, the odds of receiving larger returns from Mutual Funds are substantially higher in the long run. Debt Mutual Funds are the greatest alternative if you wish to make a short-term investment.

Liquidity

As the name suggests, Fixed Deposit is Fixed which means liquidity in FDs is not easy. You will have to pay a penalty if you want to redeem a Fixed Deposit before its maturity time. In addition, the penalty will be removed from the refund.

Mutual funds, on the other hand, are extremely liquid. Its units may be redeemed at any moment with a few mouse clicks, and the funds will be sent into the selected bank account within two to three business days. In reality, some Debt Funds have no exit burden when they are encashed.

Risk

One of the most significant advantages of FDs is the assured safety element; nevertheless, in the event of a bank default, you would only get the amount that has been insured, which is up to Rs 5 lakh. That is, even if you invest Rs 10 lakh, you will receive Rs 5 lakh, which is the guaranteed amount if the bank fails.
Meanwhile, even if the minimum Debt Mutual Fund return level is not guaranteed, a loss is only conceivable if an investor decides to redeem the money based on market movements.

Tax Liability

The percentage of tax is determined by your income slab in the case of bank FDs. That implies that if your income tax bracket falls under 20%, your FD returns will be taxed at 20%.

Long-term capital gains, on the other hand, are assessed after a debt fund investment has been held for three years. As a result, you'll have to pay a 20% tax, but your Debt Funds investments will profit from indexation. The government provides indexation to mutual fund investors as a type of tax relief.
The short-term gain from Mutual Fund returns, i.e. earnings from investments of less than three years, is taxed and added to the investor's annual income.

Conclusion

We avoid mutual funds in favour of bank FDs, believing the latter to be a far safer investment alternative. Mutual Funds have the potential to outperform FDs in the long run. Furthermore, when compared to the benefits of a fixed-income investment, mutual funds are extremely liquid and tax efficient. As a result of the aforementioned criteria, mutual funds are a superior investment alternative than FDs.