Conservative investors generally avoid investing in risky asset classes like equity, real estate etc. For such investor fixed deposits or mutual fund debt schemes are among the best choices. Both of them yields returns in the form of interest earned however their are few features which differentiates them from each other. Lets us glace through some of the important angles which will help us in choosing among them.
Safety – It is the primary thing which a risk avoiding investors look for. In the event of failure of a bank, the deposit insurance scheme of the government comes to the rescue especially for the small depositors. An amount upto Rs 1 lakh per depositor in a bank (across branches) will be paid by the insurer. This limit is inclusive of principal and interest. Such type of insurance is absent in Mutual fund schemes.
Premature closure – Generally a person invests money when he does not require funds however that does not necessarily means that he will not need the same before maturity. Such unplanned requirements asks for premature closure of deposit and immediate withdrawal of money. In case of bank deposit, the depositor can prematurely close the deposit however, a penalty needs to be borne for such premature closure. Similarly in mutual fund also, a charge applicable but just for first six or twelve months, termed as exit load. Post this period, it is said to more flexible than bank deposits.
Scope of return – The investors looking towards such fund should ideally target to beat inflation which means should expect 8-9 percent return if inflation stands at 7 per cent odd. While Bank deposit offers fixed interest rates, in case of mutual funds no return is guaranteed. Here I must mention that it is very much possible to earn returns that are much higher than in a bank deposit.
Tax – Taxes payable on fixed deposits are as per individual tax slabs while in mutual funds, an investor can enjoy a lower tax with indexation benefit. Another point, interest earned in a bank deposit is taxable each year, however, if a unit holder allows the investment to grow in a mutual fund scheme (which in turn is exempt from tax), then no income tax is payable on year to year accretions. As such compounding also happen of the amount which was the tax liability of that year and as such the money can grow much faster in a mutual fund scheme.
Choice – Their are various banks and mutual funds which offer fixed deposits and debt schemes respectively. While I must say that Mutual funds offer various facilities to make it easy for investors to move their money between different kinds of mutual fund schemes. These are not available with a bank deposit.
Looking at these pointers, we may conclude that while fixed deposit offer better safety and guaranteed returns, Mutual fund debt schemes offer better flexibility, lower tax burden and wider choi
