Barring a few hiccups notwithstanding, India is heading for lower interest rates on Bank Deposits for years to come, if not for decades. If one steps out of their economic comfort zone into the real life of savers, a huge amount of damage will already be done. A measly 2 to 3.5% on the savings bank deposits and 5 to 7 % on other deposits are going to become normal from now on.
Most Indian savers especially retirees are dependent on bank fixed deposits. Their earnings are said to have fallen by 25% or more in the past 3 years. Is there a solution? You may wonder. As it happens, yes there is. Mutual fund products may fit the bill perfectly. The right mutual fund products not only give you higher returns than banking products but also are liable for lower tax outgo, thus making effective returns attractive.
As an informed investor, you must make sure you cross check information and devise an investment strategy after taking into account multiple factors. It is quite easy to get carried away by viral news stories and current market trends as far as investing is concerned as it is more important that you evaluate your own needs and risk appetite before you invest. As popular investment vehicles both fixed deposits and mutual funds have their own set of investors and if you are struggling to decide what to choose, it is important that you weigh your options carefully and decide accordingly.
What are Fixed Deposits (FD) and Mutual Funds (MF)
Fixed Deposits (FD) is one of the most popular saving instruments that is provided by banks for short-term as well as long-term investments. The rate of return on FDs is fixed and pre-decided by the Government of India; hence growing, decreasing inflation does not impact the return on these investments. Returns are taxable even though they are eligible for tax deductions under Section 80C.
Mutual Funds, on the other hand, are market-based investment instruments that have no fixed rate of return, but in the long run, it is observed that equity mutual funds can give 10 to 15% return which is higher when compared to FD’s. They are of 3 types aka- Debt, Equity and Balanced.
Debt Mutual Fund: A majority chunk of the investment amount is placed in government, corporate bonds and securities and the rest in equity markets.
Equity Mutual Funds: More amounts are invested in equity markets and lesser in government, corporate bonds and securities
Balanced Mutual Funds: Here funds are invested partially in both Debt and Equity Funds.
Difference between FD and Mutual Fund
Our burning question still remains, whether to invest in a mutual fund or fixed deposit. Here is a comparison of both that is based on certain parameters which can help you make a decision.
1) Rate of Return: The interest rates on FD’s are fixed based on tenure and type. You cannot expect a higher rate of interest. Whereas in Mutual funds, the rate of return depends on market volatility as well as the type of fund. When the market sees a high, you can expect higher returns and vice versa.
2) Return on Investment: A fixed deposit gives pre-decided returns which do not change through the tenure of investments. A mutual fund offers a better return on long term investments when they are market linked. Longer the tenure, higher will be the returns.
3) Impact of Inflation: Fixed deposits are unaffected when it comes to inflation as the interest rates are pre-decided. Whereas fund returns are inflation adjusted that enhances the capability to generate better returns.
4) Risk factors: FD’s are considered the safest with no risk on returns whereas MF has high risks on investments. Equity MF’s that have a majority of amounts invested in the stock market possess higher risks than Debt MF’s.
5) Liquidity: FD’s are not liquid as they remain locked for a certain period of time. A penalty is charged by the investor if an FD is withdrawn before maturity. On the other hand, Mutual Funds possess higher liquidity as the funds can be sold even within a short period of time without even depreciating the fund value. However, some funds charge exit load if withdrawn within a year.
6) Taxes and Tax Savings: Interest that is earned from an FD is taxable depending on the tax slab of the individual whereas taxation on Mutual funds will be dependent on the holding period. Short term and long term capital gains are taxed differently. Under FD’s saving tax under 80C is eligible only after the completion of 5 year lock-in period. Whereas you can consider the ELSS (Equity Linked Savings Scheme) Mutual Funds as an alternative since it has the lowest lock-in period of 3 years and it has given better return historically.
Which is better, FD of MF?
The decision to invest lies purely with you. It depends on the investor’s risk capacity and the surplus amount he/she would like to invest. An FD generally requires a lump sum amount whereas in MF, it can be done for as low as 100 INR per month. It makes a greater sense to invest in Mutual Funds as it offers a better return in the long term and you can plan accordingly as per goals that you would like to achieve.
How to invest in the stock market
Investors must mandatorily buy and trade stocks through brokers. However, off-market trade or transfer is possible on one to one basis. When it comes to wise investments, it helps to be with the experts. You can open a trading account with a stock broker and resume the trade or investment by depositing cash. Firms like us offer zero brokerage accounts that can be managed online.
We, TradePlus online are one of the leading stock brokers in India, with over 30 years of experience in Indian Capital Market and a strong presence worldwide. We are members of the National Stock Exchange (NSE) and the Bombay Stock Exchange Ltd (BSE Ltd), and have around 40,000 clients.
Now let’s learn how to invest in shares/share market
1) Decide how you want to invest in stocks
2) Hire a stockbroker online/offline. (Tradeplus can help)
3) Open an investing account- a Demat and a trading account
4) Set a budget for your stock investment
5) Based on your risk taking nature, diversify your investment into different financial assets
6) Start investing