Fixed Deposits vs Mutual Funds – How to Manage Funds

In the financial industry, every sector has its own benefits such as Fixed Deposits, Health Insurance, Mutual Funds, Life Insurance. Fixed Deposits Give You Guarantee returns and mutual funds give you a higher return than fixed deposits but involve risk. But it’s about how to plan and diversify your funds so that you can get high returns and maintain some amount for emergencies. It is an important decision to select which time is good for investment and which is good for withdrawal. Whether you should go with Lumpsum or SIP. Management of taxes is also an important aspect of financial management. Which age is good for which financial product is one of the most important topics to consider while investing. In addition to that, what duration are you planning for investment and what are your goals.


What is a Fixed Deposit?

A fixed deposit is a financial instrument that gives a guarantee of the principal amount invested and gives interest on the investments. The interest rate may depend on the duration and interest mode. Generally, Fixed Deposits are done at Banks and NBFCs (Non-Bank finance companies) such as PNB Housing, Bajaj, Shriram Transport Finance Company, Mahindra and more. Usually, NBFCs give a higher returns than bank FDs. Reputed banks give low-interest rates and small banks give higher interest rates to attract customers. It is important for a person who is investing, whether he can take risk and for how long and at what amount. Everyone wants higher interest rates but nobody wants to take risks. Without risk, you cannot earn much but it’s important to manage your risk by not just focusing on the interest rate but checking the company or bank’s reliability.


What are Mutual Funds?

Like Fixed Deposits, Mutual Funds don’t invest within their own company. Instead, they act as a mediator. A mutual Fund company which is known as an Asset Management Company (AMC) collects funds from people and invests in Market or Bonds and generates a return and delivers to the end customer who invested the money. The AMC charges their nominal fees for that which is known as the expense ratio. There is no guarantee of principal in mutual funds. Depending upon several factors such as investment time, current market conditions, duration, payment mode, type of fund and many more factors. But, it’s important to take risks to earn more depending on your age and funds requirements.


Taxations in Fixed Deposits and Mutual Funds

Income is taxable in Fixed Deposits. In Mutual Funds, there are two types of funds (1) Equity and (2) Debt. There are two types of gains, STCG (Short Term Capital Gain) and LTCG (Long Term Capital Gain). In equity, if you withdraw your investments within 12 months, you have to pay STCG which is a flat 15% on the interest amount and if you hold and withdraw after 12 months you have to pay 10% tax on the interest amount exceeding 1 Lac. In the case of Debt Mutual Funds, if you withdraw before 3 years, you have to pay STCG which means the interest amount will be added in your income and after 3 years you will get an indexation benefit.

Banks with 5 Years locking FD and Mutual with 3 years locking in ELSS (Equity Linked Saving Schemes) Funds. Both are for Tax Rebate u/s 80C.


Comparison between Mutual Funds and Fixed Deposits based on Age of the investor

If your age is  20 – 40yrs. You can invest the majority of your investments in Mutual Funds in SIP (Monthly Investment Mode). Initially, at the age of 20yrs, you don’t have any liability so he can invest in aggressive mutual funds like Mid cap and small cap because the funds you can plan for 7 to 10 years. If your age is 30 to 40 years then have must be having some family responsibilities so you should invest less in aggressive funds and more in large cap or balance funds so that in case the market is down, you don’t have to face huge losses. After 40yr you should start moving to FDs because you need liquidity and can’t take market risk all the time. You should invest in FDs and small amounts in Large Cap, index, multi-cap, sector funds. At the age of 60yrs, you should start SWP means (Systematic withdrawal plan) monthly amount refund from mutual fund to your saving bank for retirement life and keep the majority of funds in FD’s. you as an investor can still invest small amounts in balance funds or large cap funds keeping in mind the market risk is involved.


How should I diversify my fund between Fixed Deposits and Mutual Funds?

In the young days, take more risks and invest in the long term. Don’t worry about short-term losses. After marriage plan for less risky funds and invest in insurance also. After retirement go for Fixed Deposits with a nominal amount of mutual funds with less risk.


What are types of Mutual Funds?

There are two types of funds (1) Equity – Market Linked (2) Debt – Safe funds invest in Bonds and government securities. Another option is a balanced fund which is a combination of Equity and Debt funds. ELSS fund is for tax saving and it doesn’t invest 100% in equity. Other are sector funds that invest in a particular sector, index fund which is linked to Sensex. Large Cap which invests in the top 100 companies, mid cap which invests in 100 to 150 companies and small cap which is the most risky and gives the highest return and invests in companies over 250 in the list. To keep your huge amount out of the bank but don’t want any investment – invest in a liquid fund.


To avoid Tax on maturity which is better. Fixed Deposits or Mutual Fund?

To avoid tax liabilities, you should go for mutual funds with Long Term Capital Gain (LTCG) in which your equity investment is non-taxable up to 1 lac interest amount according to the current rules. In a debt fund, you will get an indexation benefit.


Should I invest in one Mutual Fund or multiple funds?

Invest in multiple funds for any AMC’s depending up to on your risk and requirement you can make a selection. For more guidance, you can talk to our experts also.


Should I invest in Lumpsum or SIP in Mutual Funds?

On regular basis, SIP is the best option because you are investing in every market situation so you will get a higher return with zero tension. If you are aware of market ups and downs and keep track, then you can go for Lumpsum investment when the market is low. Another option is investing the lump sum amount in debt or liquid fund and starting STP (Systematic Transfer Plan) to any other equity plan. You can do Monthly, weekly and daily SIP’s also from one fund to another fund.


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