How do I Compare Mutual Funds with Fixed Deposit (FD)?



As salaried individuals are becoming more informed about the benefits of early retirement planning, they are looking for various instruments to implement it. Retirement planning is of utmost significance for salaried individuals and middle-income groups. Also, it is essential to start saving for retirement as early as possible. The CRR’s 2018 report “Will Millennials Be Ready for Retirement?” states that millennial–despite high education levels–are behind previous generations on many indicators that help boost retirement preparedness. Not surprisingly, then, millennials have less wealth, even though they will need more due to longer lifespans and reduced social security.”

Fixed Deposits – Popular Retirement-Saving Options

In such a scenario, fixed deposits and mutual funds are the two common options to build a retirement corpus. Both are aimed at creating active income streams which are useful when the regular income stops after the completion of work tenure. As compared to other modes of saving options, these two are considered are well within the respective risk-taking capacities. When chosen wisely, these two options can help in building a sizeable corpus for retirement. If you are wondering what is a fixed deposit and what are mutual funds, here’s some information to help you.


Advantages of Fixed Deposits

A fixed deposit is the go-to investment choice for many people. It’s a low-risk alternative as compared to other profitable options such as corporate bonds, stocks, and other market tradable securities. It has a faster rate of convertibility to cash, offers long-term, and low-risk returns which are not prone to effects of inflation.  

A steady source of returns provided by fixed deposits helps maintain the overall return of a portfolio during a slowdown by allowing a person to earn risk-free interest on deposits. For example, Punjab National Bank pays an interest rate of 3.25% on savings to account with balance up to ₹5 lakh; while 3.50% on paid on savings accounts with balance ranging between ₹5 lakh to ₹50 lakh. As compared to the general public, senior citizens get 50-basis-point higher interest rates on fixed deposits. Liquidity is not applicable to fixed deposits as the amount invented remains locked for a certain period.

What is a Fixed Deposit

A penalty is charged if the fixed deposit amount is withdrawn before the maturity. For saving taxes through FD (according to Section 80C of the IT Act), an investor will need to complete the 5-year lock-in period. If you are a first-time investor in FD, you may use a fixed deposit calculator. It will help you check the returns you will get on the amount deposited, based on the interest rates offered by the bank you have chosen.

Comparing Fixed Deposits With Mutual Funds

When it comes to mutual funds, it is a medium-to-high risk financial instrument that offers returns higher than FD. On average, mutual funds (especially large-cap equity funds) can bring a return of 12-18% large-cap equity funds which varies from 12 to18 percent per annum. Remember that the longer the tenure of investment, the better will be the chances of profitable returns on mutual funds. Moreover, mutual-funds returns are generally inflation-adjusted, hence generate better returns.

Though, affected by market volatility, the returns get back on track after a phase of extended bearishness among the participants and investors. The dynamic underlying assets of mutual funds (unlike benchmark equity indices Nifty and Sensex) and revision of schemes to optimize returns help increase their sustainability.

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