Financial Awareness Level
Mutual Funds vs Fixed Deposits: A Detailed Comparison
Fixed deposits (FDs) and mutual funds (MFs) are two popular investment options available to investors. While both products generally deliver returns, they differ in many aspects. Let’s compare the two options in detail and highlight their differences.
Asset Class
- FDs are a type of debt instrument and are typically used for saving money. They offer a fixed rate of interest on the deposited amount.
- MFs, on the other hand, invest in various asset classes, which includes equities, fixed income, commodities or a mix of these. They are primarily used for wealth building and management.
Regulation
- FDs are typically offered by banks, non-banking financial companies, housing finance companies, and manufacturing companies. They are regulated by the Reserve Bank of India (RBI).
- MFs are regulated by the Securities and Exchange Board of India (SEBI).
Selection Criteria
- When selecting FDs, investors typically look at the credit ratings or the reputation of the institution offering the FD.
- For MFs, investors look at various aspects, including the fund manager's competence, experience, past track record, and investment philosophy.
Underlying Portfolio
- FDs may or may not have an underlying portfolio.
- MFs invest in a portfolio of securities, and the complete portfolio details is uploaded on website periodically.
Source of Return
- In FDs, the interest income is the primary source of return.
- In MFs, Income Distribution cum Capital Withdrawal (IDCW) and capital gains are sources of return.
Timing of Returns
- FDs pay interest at designated frequencies, such as monthly, quarterly, semi-annually, or annually, or can be cumulative.
- Returns in MFs are in the form of IDCW and redemption proceeds realized at the time of withdrawing money.
Pre-mature Withdrawals
- Pre-mature withdrawals from FDs attract penal interest provisions.
- Exit loads are levied in a few MF schemes, as applicable.
Taxation*
- Tax is applicable on income accrued in FDs.
- Tax is applicable on realized gains or IDCW received in MFs.
*In view of individual nature of tax consequences, each investor is advised to consult his / her own professional tax advisor.
Conclusion
In summary, while both FDs and MFs generally deliver returns, they differ significantly in terms of their underlying asset class, regulation, selection criteria, underlying portfolio, source and timing of returns, pre-mature withdrawals, and taxation. Therefore, investors should carefully evaluate their investment objectives, risk appetite, and financial goals before choosing between the two options. For those who are uncertain, seeking the help of a certified MF distributor or a registered investment advisor may be beneficial.
Table 1 Mutual Fund vs Fixed Deposit: Table of Differences
| Fixed Deposits | Mutual Funds |
|---|---|
| Predominantly an instrument for savers. | A platform for parking surplus money for investments and wealth management. |
| Constitutes a part of the Debt asset class. | Mutual Funds invest across various asset classes depending on investment objectives. |
| Credit ratings or an institution’s name and reputation are a basis for selection. | Amongst various other aspects, Fund manager’s competence, experience, and past track record along with MF investment philosophy constitute selection criteria. |
| May or may not have an underlying portfolio. | Invest in a portfolio of securities. Complete portfolio is shared/ uploaded on websites. |
| Interest income is the primary source of return. | IDCW and capital gains are sources of return. |
| Interest can be paid annually, quarterly, semi-annually, or can be cumulated. | Returns in MFs are in the form of IDCW and redemption proceeds realized at the time of withdrawing money |
| Pre-mature withdrawals attract penal interest provisions. | Exit loads are levied in a few MF schemes, as applicable |
| Tax is applicable on income accrued. | Tax is applicable on realized gains or IDCW received. |
The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
FAQ Section
What are fixed deposits?
Fixed deposits (FDs) are a type of debt instrument primarily used for saving money. They offer a fixed rate of interest on the deposited amount.
How are mutual funds different from fixed deposits?
Mutual funds (MFs) are a platform for parking surplus money for investments and wealth management. They invest in various asset classes, which includes equities, fixed income, commodities, and a mix of these, while FDs are a part of the debt asset class.
How are mutual funds regulated?
Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and are required to disclose timely performance information.
What factors do investors consider when selecting fixed deposits?
When selecting FDs, investors typically look at the credit ratings or the reputation of the institution offering the FD.
What factors do investors consider when selecting mutual funds?
For mutual funds, amongst various other aspects, investors look at the fund manager's competence, experience, past track record, and investment philosophy.
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Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.gov.in. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
