FD vs Mutual Funds- Check This Guide Before Investing!

FD vs mutual fund

Whether to invest in fixed deposits or mutual funds is a dicey question! Both are different from each other in terms of features, benefits, eligibility criteria, market risks and more. Fixed deposits involve little or no market risk, whereas mutual funds are driven by market forces. Banks offer the fixed deposit services, whereas fund houses or asset management firms offer individuals the chance to invest in mutual funds.

There are many more differences between mutual funds and fixed deposits which should be taken into consideration before choosing the one to invest in. This blog will explain everything about FD vs mutual funds and the right investment option.

What is a Fixed Deposit Account?

FD or a Fixed deposit known as ‘term deposit’ or ‘time deposit’ is an investment instrument offered by banks and non-banking financial companies (NBFC). Being the safest investment instrument out of many others, it allows users to deposit a lump sum amount for a particular time period with the financial institution. In addition to this, FD provides the users with a lot 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
  • The rate of interest once locked, remains unaffected by any changes in the market or interest rates
  • You can earn interest either periodically or at the time of FD maturity
  • A fixed deposit amount cannot be pulled before the maturity date and if in case, someone wants to withdraw the amount, he/she is required to pay a penalty for it

What are the Benefits of a Fixed Deposit Account?

There are several benefits of a fixed deposit account that make it unique and a risk-free investment option to invest in-

  • Fixed deposits are considered the safest option as the rate of interest does not fluctuate with the 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 offline and online by following a few simple steps just like creating an FD account with Paytm Payments Bank
  • Banks allow depositors to reinvest the FD amount after maturity, on which, a depositor can get compound interest on the principal value
  • Fixed deposits offer flexible tenure that starts from 7 days to 10 years
  • Banks offer the ease to let a depositor get a loan against the fixed deposit value

Who Should Invest in Fixed Deposit?

A fixed deposit account can be opened by the following people-

  • A person who is not willing to take market risks
  • The person with taxable income can invest in FD
  • A retired person who would like to have a regular source of income can apply for FD schemes
  • Housekeeper with decent money in hand can compare various FDs and invest in one accordingly

What are Mutual Funds?

Mutual funds are another form of investment instrument when an asset management company or fund house pools out investment from individual investors and institutional investors. The process then continues when a fund manager buys securities like bonds and stocks from the market that is in line with the investment mandate. Mutual funds are considered one of the excellent options 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-

  • Mutual fund investments are managed by fund managers
  • Mutual fund investments are pooled by the asset management companies and fund houses
  • There is no lock-in period
  • Mutual funds offer fund plans making it a suitable option for investors to meet their short and long term goals
  • Switching funds is easy. An investor can move his/her investment to a different fund of the same fund house accordingly
  • Mutual funds come at a low cost, which makes them a convenient and suitable option for small investors
  • Investment can be made via SIP (Systematic Investment Planning). SIP frequency can be monthly, quarterly and bi-annually
  • Buying and selling of the fund units are made at the prevailing net asset value of the mutual fund plan
  • An investor can track his/her mutual fund investment
  • The investment amount for mutual funds is eventually allotted to different assets and shares of several companies
  • Mutual funds offer dual benefits, which are SIP and no lock-in period
  • Mutual funds offer liquidity
  • Mutual funds houses and mutual fund plan works under the purview of the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI)

Who should Invest in Mutual Funds?

Following is the list of people who can invest in mutual funds-

  • Anyone who wants to achieve a short or long term financial goal
  • If one is looking forward to earn higher returns as compared to a regular savings bank account
  • Anyone who wishes to diversify his/her 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 FD or mutual funds, it is advised to go through all the features, advantages, limitations, risk factors, short-long term financial goals, liquidity and others. Once done with the basic factors between FD vs mutual funds, the next step is to compare different banks, asset management companies, fund houses in terms of services, fund management practices, etc. The last step before picking the best investment instrument is to understand the market conditions and personal requirements.

Is it possible to withdraw the FD amount before maturity?
Yes, in case of an emergency fund requirement, the depositor can withdraw the amount 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?
Login to the Paytm application, click on Paytm bank, next, click on create a fixed deposit, enter the amount and proceed to create Paytm Payments Bank fixed deposit.
What is the current interest rate on mutual funds??
Different fund houses and asset management companies offer different interest rates on mutual funds.
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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