Where should you invest? Which is better between FDs and Mutual funds? Well, there was a time in India between 1995 to 1997 when the most favoured traditional investment option was Bank Fixed Deposits.
Understandably so because it provided approximately 13% returns in a safe manner. But a lot has changed between now and then. Currently, the interest rate of FDs ranges from 4-8%.
What Is A Fixed Deposit?
A Fixed Deposit or FD is a lump sum investment option provided by Banks and Non-banking Financial Companies (NBFCs). It is generally considered to be very safe because the interest rates are pre-decided by the Government and do not change regardless of inflation or market fluctuations.
Even in 2020, Fixed Deposits, Recurring Deposits, National Savings Certificate, and some traditional instruments, that investors add to their portfolios. This is due to 2 reasons: Safety and low risk.
The safety blanket that an FD provides is, of course, alluring. But post-tax FD returns barely beat inflation. So the safety here basically translates to conserving wealth rather than growing wealth. The loss aversion principle generally applies to Indian investors when it comes to FDs Vs Mutual Funds. FDs are low risk, low reward investments as compared to moderately high risk, high reward mutual fund investments. Now, let’s take a quick look at mutual funds as investments.
A mutual fund is a market-based instrument in which a pool of money is collected from several investors. A fund manager invests this pool of money in various options such as stocks, bonds, debt, and more. This diversification helps minimize the risk and maximize the returns.
Why People Invest In Mutual Funds
Mutual funds have historically produced comparatively better returns with strict regulations and laws. But the benefits of mutual funds have only recently been acknowledged by Indian investors.
Mutual funds offer the unique advantage of diversification and investing through a Systematic Investment Plan. SIPs can help you think long term and be carefree about short term market fluctuations.
So should you aim to conserve your wealth with FDs or create wealth for your future self by diligently investing in mutual funds? Let’s figure out the answer to this question by understanding the difference between FDs and mutual funds.
Check out this video to know more about alternative investment options better than FDs
The Difference Between FDs and Mutual Funds
Reserve Bank of India (RBI)
Securities and Exchange Board of India (SEBI)
The Benefits And Risks Of Investing In FDs And Mutual Funds
3 Benefits Of Investing In FDs
2. Low risk
3. Better interest rate than bank savings a/c
3 Risks Of Investing In FDs
1. Less than stellar post-tax returns
2. Low liquidity
3. Bank defaults
3 Benefits Of Investing In Mutual Funds
1. Indexation benefits
2. Potentially high returns
3 Risks Of Investing In Mutual Funds
1. High volatility
2. Market based risks
3. Currency based risks
Bottom Line: Should You Invest In FDs Or Mutual Funds?
The mutual fund AUM to GDP ratio in India is 11%. This is significantly less than the mutual fund AUM to GDP ratio in the US which is currently 103%.
But a combination of awareness of mutual fund schemes through campaigns such as #MutualFundsSahiHai and the historical returns have led to the consistent growth in mutual fund investments in India.
FD rates are currently very low as compared to a few years ago. According to data, Indian investors are moving away from FDs. The most favourite traditional investment has seen a decline from 63.5% to 58.6% since 2008. At the same time, FDs offer unparalleled safety.
Whether or not you should invest in mutual funds as compared to FDs would depend on your investment goals and the risk you are willing to take. Speak to a wealth coach today to know whether you should invest in debt funds, liquid funds, ELSS funds, and more.
Are there better ways to invest your money? Watch this video to know more.
Cube Wealth Investment Quotes
"In investing, what is comfortable is rarely profitable." — Robert Arnott
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.
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