Most
of the first time, investors do not know the difference between savings and
investing. Savings is allocating a part of your income so that it can help you
during tough times, which might demand finances. Investing is a step further
than savings where you get better returns than a savings account. When we talk
about investing, we can classify them into two types - low risk and high-risk
investments. Higher the risk, better the returns. The million-dollar question
is - should a first-time investor take risks or go with the traditional form of
investing.
Fixed deposits:
Fixed
deposits have been here for a very long time, and thus it would come under the
traditional form of investing. FDs offer fixed returns throughout fixed tenure,
which can range from 7 days to 5 years. The interest amount depends on the FD interest
rates published by the financial institutions, and it will vary from one
institution to another. The fixed deposit returns are taxable, but the
investments are eligible for tax exemption based 80C of IT act. The FD status
can be active within two days of opening a fixed deposit account.
Mutual Funds:
Mutual
Funds would come under high-return and high-risk quadrants of an investment
portfolio. MFs are purely marked-based, and the returns will depend on the
performance of business stocks in the share market. MFs can provide upto
12%-15% returns in the long tenure, which comes with market risks. Mutual funds
are classified into three types: debt, equity and balanced based on the
preference of the investors.
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FD vs MF: Which one to choose?
You
can decide on investing in either mutual funds or fixed deposits based on the
following comparison:
ROI & returns:
The
return on investment is higher in mutual funds as they are dependent on markets
which are typically volatile. Comparatively, the returns are lower in FDs as
there is lesser risk involved. Based on the performance, mutual funds can even
exceed the expectations of the investor, but since the interest rates are fixed
in case of FDs, the investor will receive lesser returns.
Risk factor:
Mutual
funds are tied to the markets, and hence the risk factor is naturally higher
whereas there are almost zero risks involved in FD investments. If you decide
to invest in a reputed financial institution, the risk factor goes further down
when it comes to FDs.
Liquidity:
If
you decide to break an FD before the maturity date, your bank/NBFC may levy
penalty charges. In contrast, in the case of mutual funds, there are no charges
for liquidity as you can immediately close the MF account and have the money
back.
Conclusion:
An
experienced investor would have a diverse portfolio where he/she will invest in
both high risk & low-risk components to balance the investments. Such a
strategy would ensure smart investments and better returns. However, the
discretion is with you to invest carefully after comparing various options as
it is your hard-earned money, and you cannot gamble with returns.
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