Mutual Funds vs FDs: Which one is a better investment option for you?

Investments are good. They have the potential to make you rich! With so many instruments available in the market, it is not easy to decide which financial tool is the best. While most people still like to invest in traditional instruments, others are coming up with unique ways to grow their money. For example, Department of Real Estate Studies & Research, Dubai Land Department (DLD), earlier this month revealed that Indians have invested hugely in Dubai realty in the first nine months of 2018 expecting high returns. Indians, in fact, became the largest foreign investors in the sector. 

The big question, which still haunts a lot of investors is whether to put money in Mutual funds or bank FDs (fixed deposits)! Mutual funds usually come with at least moderate degree of risk while bank FDs are more suitable for investors who are not willing to risk their money for an opportunity to earn higher returns. 

Bank FDs usually give an interest rate of around 6.75-7 per cent (public and private sector banks, for tenure of three years). In case of mutual funds, the investor always have a chance of getting overwhelming returns but that comes with a lot of risk involved. 

How to decide where to invest? 

For any investment, it is important to decide what the goal is: buying a car, buying home, child education, retirement corpus or anything else. Without this, it won't be sensible to decide the investment instrument. "You don't put money in FDs unless it is a very short period. Any investment is done for some purpose. At the end of the day, the money invested has to be used for something and that is the best way to decide," investment advisor Harsh Roongta told Zee Business Online.

He said if the investor's need is in next two to three years, then only FD comes into the picture. 

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Jitendra Solanki, Founder, JS Financial Advisors also believes that mutual funds will definitely give better returns in long term and should be the go-to option if the investor is eyeing a long term investment. "If you are looking for a long term investment, mutual funds are always better," he said. 

The investors should also know that all mutual fund institutions are required to classify their funds in certain categories. This is done on the basis of risk involved while investing in these funds. It enables an investor to select a mutual fund.

Which is better? 

According to Roongta, fixed deposits can only be compared with debt mutual funds and it would be unfair to compare them with equity mutual funds. "The investors can put money in FDs-like mutual funds. What is important is to understand that fixed deposits cannot be compared with equity funds. The customers need to decide between FDs and four type of funds: Fixed Maturity Plans (FMPs), Liquid funds, Ultra short-term funds and Short term funds," he said. 

Roongta added that between these, if the investor is a high-taxpayers, i.e, his or her taxable income is more than 5 lakh per annum, the above-mentioned four funds will suit them more. He said, however, if the taxable income is less than Rs 5 lakh per annum, bank FDs are more suited for the investor. 

Solanki, on the other hand, believes that putting the money in mutual funds can benefit the investors beyond growing it. He said that mutual funds are also more tax efficient and are better investment instrument even in a shorter term like three to five years.

"Ideally, mutual funds are better and more tax efficient. In the longer run, mutual funds will always give you better returns than fixed deposits. But, even in shorter term like three to five years, mutual funds are more tax efficient as they have long term capital gain tax whereas, fixed deposit still comes under your normal income tax slab," Solanki said.