FD vs Mutual Funds- Check This Guide Before Investing!

FD vs mutual fund
FD vs mutual fund

It’s difficult to decide whether to invest in fixed deposits or mutual funds. Both differ in terms of features, benefits, eligibility criteria, market risks, and other factors. Fixed deposits are subject to little or no market risk, whereas mutual funds are subject to market forces. Banks provide fixed deposit services, whereas fund houses or asset management firms provide individuals with the opportunity to invest in mutual funds.

There are numerous differences between mutual funds and fixed deposits that should be considered before deciding which to invest in. This blog will explain the differences between FDs and mutual funds, as well as the best investment option for you.

What is a Fixed Deposit Account?

A fixed deposit, also known as a ‘term deposit’ or a ‘time deposit,’ is an investment product offered by banks and non-banking financial institutions (NBFC). It is the safest investment instrument among many others because it allows users to deposit a lump sum amount with the financial institution for a specific time period. In addition, FD provides users with a plethora of other features such as-

  • You can earn interest on the deposited amount for the pre-decided tenure, as per the rate of interest locked earlier
  • Once locked in, the interest rate is unaffected by market or interest rate fluctuations
  • You can earn interest either on a regular basis or when your FD matures
  • A fixed deposit amount cannot be withdrawn before the maturity date, and if someone does want to withdraw the amount, he or she must pay a penalty

What are the Benefits of a Fixed Deposit Account?

A fixed deposit account offers several advantages that differentiate it as a unique and risk-free investment option:

  • Fixed deposits are considered the safest option because the interest rate does not fluctuate with changing market conditions
  • Banks offer assured rates of interest on fixed deposits and a depositor can check the interest that he/she will receive through the FD calculator available on the bank’s website
  • A major number of banks offer tax-saving fixed deposit options
  • A depositor can open a fixed deposit account both offline and online by following a few simple steps similar to opening an FD account with Paytm Payments Bank
  • Banks allow depositors to reinvest the FD amount after maturity, allowing the depositor to earn compound interest on the principal value
  • Fixed deposits offer flexible tenure that starts from 7 days to 10 years
  • Banks make it simple for depositors to obtain loans against the value of their fixed deposits

Who Should Invest in Fixed Deposit?

The following individuals can open a fixed deposit account:

  • Someone who is unwilling to take market risks
  • Individuals with taxable income can invest in FDs
  • A retired person who wants a continuous source of income can apply for FD schemes
  • Housekeepers with sufficient funds can compare various FDs and choose the best one for them

What are Mutual Funds?

Mutual funds are another type of investment instrument in which an asset management company or fund house pools investment from both individual and institutional investors. The process is then completed when a fund manager purchases securities such as bonds and stocks from the market in line with the investment mandate. Mutual funds are regarded as one of the best ways to diversify investment portfolios.

What are the Benefits of Mutual Funds?

Given below are a number of reasons a person should or try investing in a mutual fund-

  • Fund managers manage mutual fund investments
  • Asset management firms and fund houses pool mutual fund investments
  • There is no lock-in period
  • Mutual funds provide fund plans, making them an attractive option for investors seeking to achieve both short and long-term objectives
  • It is simple to switch funds. If necessary, an investor can transfer his or her investment to a different fund within the same fund house
  • Mutual funds are inexpensive, making them a convenient and suitable option for small investors.
  • Investment can be made via SIP (Systematic Investment Planning). The frequency of SIPs can be monthly, quarterly, or biannually
  • Buying and selling of the fund units are made at the prevailing net asset value of the mutual fund plan
  • An investor can keep track of his or her mutual fund investments
  • The amount invested in mutual funds is eventually allocated to various assets and shares of various companies
  • Mutual funds provide two advantages: SIP and no lock-in period
  • Mutual funds provide liquidity
  • Mutual fund houses and mutual fund plans are regulated by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI)

Who should Invest in Mutual Funds?

People who can invest in mutual funds are as follows:

  • Anyone who wishes to achieve a short or long-term financial objective
  • If you want to earn more money than a regular savings account
  • Anyone looking to diversify their investment portfolio

Comparative difference between FD vs Mutual Funds

The following points define the comparative difference between FD vs Mutual funds-

CriteriaFixed DepositsMutual Funds
ReturnsFixed and guaranteed returnsDepends upon the market condition
ExpensesNo expenses occur during the tenureCarry certain charges and expenses which are deducted to manage the funds
RiskNo riskRisk varies from fund to fund
Influences by the market conditions
Lock-in periodYesNo
WithdrawalPremature withdrawal of the amount is allowed
A penalty has to be paid by the user for premature withdrawal
Amount can be withdrawn after a given point in time
Who can investOne who is not willing to take market risks
The person with taxable income
A retired person who would like to have a regular source of income
Housekeeper with decent money in hand
One who want to achieve a short or long term financial goal
Anyone who wishes to diversify his/her investment portfolio
Person who is willing to earn higher returns as compared to a regular savings bank account
Offered byBanks and financial institutionsAsset management companies
Fund houses
LiquidityMedium to high liquidityHighly liquid
Regulated byReserve Bank of IndiaSecurities and Exchange Board of India

FD vs Mutual fund- the best option to invest in?

Before investing in FDs or mutual funds, it is best to review all of the features, benefits, limitations, risk factors, short- and long-term financial goals, liquidity, and other factors. After comparing the basic differences between FDs and mutual funds, the next step is to compare different banks, asset management companies, and fund houses in terms of services, fund management practices, and so on. The final step before deciding on the best investment instrument is to understand the market conditions and your personal needs.

Is it possible to withdraw the FD amount before maturity?
Yes, if an emergency fund is required, the depositor may withdraw the funds after paying a penalty.
Can I open my FD online?
Yes, the customer can open FD online by logging into the bank’s online portal.
How to create a Paytm Payments Bank fixed deposit?
Log in to the Paytm application, select Paytm Bank, then Create a Fixed Deposit. Enter the amount and click Create Paytm Payments Bank Fixed Deposit.
What is the current interest rate on mutual funds?
Mutual fund interest rates vary depending on the fund house and asset management company.
Can a salaried professional invest in mutual funds?
Any individual who would like to invest in the market or would want to gain short and long term financial goals can invest in mutual funds.
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