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Advantages of Mutual Funds over Fixed Deposit

Jatin was sitting with his friend Arun where they both were discussing how they both have made the financial investment for their future. Arun was telling how he made a Fixed Deposit where he said to Jatin that due to a medical emergency Arun broke the FD, and he had to pay some penalty and his interest were also deducted. After hearing all this, Jatin told him how advantages of mutual funds over fixed deposits investment are easier to invest in specialized market sectors since there are more economies of scale and operational efficiencies. 

What is a Mutual Fund?

Mutual funds are a collection of investments that include stocks, bonds, and money market instruments, among other things. A mutual fund comprises these holdings, and each one is called a portfolio. 

What is the Process of Investing in a Mutual Fund?

  • A mutual fund is a financial holding company that allows participants to pool their funds to pursue a similar objective.
  • The money is subsequently invested in various asset classes according to the scheme’s goals.
  • As an investor, you invest in financial assets such as stocks, bonds, and other securities. You can purchase them directly or invest in them through mutual funds or other financial assets.

 

What is a Fixed Deposit?

A Fixed Deposit is when you deposit a large sum of money into your bank for a set period at a set interest rate. You will receive your original investment plus compound interest at the end of the term. Also known as term deposits, FDs are a type of savings account.

How Fixed Deposit Work? 

  • A Fixed Deposit secures a sum of money for the duration of the deposit.
  • Banks give depositors the option of investing their money for durations ranging from seven days to ten years.
  • The interest rate on a deposit is determined by the length of time the money is kept with the bank. The depositor is not permitted to withdraw funds before the deadline.
  • Premature withdrawal is available from some banks; however, it comes with a lower interest rate.
  • The bank credits the depositor’s bank account with the principal and interest on the maturity date.

 

Difference between Mutual Fund and Fixed Deposits

Premature Withdrawal 

  • Premature withdrawals features of mutual funds are permissible as long as the minimum holding time has been met; however, if a withdrawal is made before the holding period has expired, an exit load of 1% of the fund’s value will be charged.
  • Individuals who intend to make an early withdrawal from their fixed deposits will almost certainly be asked to pay the penalty. In addition to the penalty, the individual would also lose a percentage of any anticipated profits.

 

Returns 

  • Since any investment made in mutual funds is based primarily on the market performance of one of the features of mutual funds companies in their portfolio, an individual investing in them might potentially make significantly higher returns.
  • Individuals can get a predefined rate of interest on a fixed deposit for a set significant period. This means that any money put into a fixed deposit will only earn a particular amount of interest over a set period of time.

 

Costs 

  • Investing in mutual funds entails specific charges or expenses, such as fees paid to fund managers who manage an investor’s portfolio.
  • Individuals who invest in fixed deposits, on the other hand, do not incur such costs because there are no intermediaries involved in the investment process.

 

Taxation

  • Short-term and long-term capital gains taxes apply to all mutual funds. STCG is calculated at a fixed rate of 15%, whereas LTCG is calculated at 10% of earnings beyond 1 lakh. In the case of debt funds, the LTCG is 20% after indexation.
  • On interest earned over Rs10,000 in a financial year, FDs are subject to a 10% TDS.

 

Risk

  • Mutual funds are sensitive to market fluctuations, despite the risk being dispersed among several stocks inside the fund. As a result, an investor could profit more if market conditions are suitable or lose a lot of money if they shift in the opposite direction.
  • On the other hand, fixed deposits are basically risk-free investments because investors know exactly what their returns will be over time. Fixed deposit rates do not fluctuate, and they are not affected by market fluctuations or volatility so that investors can expect a consistent return on their money.

 

FAQs:

What are the benefits of investing in mutual funds?

One of the advantages of mutual funds is that the minimum investment amount is modest. Mutual funds aid diversification. A tactical allocation of the investible surplus is possible. Your funds will be expertly managed by people with fund management experience in mutual funds, and they will also provide greater market returns than other financial tools.

How do mutual funds pay?

Mutual funds are paid in a variety of ways. Shareholders receive income from mutual funds in capital gains distributions or dividend distributions. Dividend distributions are paid out of the interest produced by a fund's assets. Mutual funds are obligated to distribute all net profits to shareholders at least once a year to avoid paying taxes on earnings.

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