7 Reasons Why Mutual Funds Are Better Than Fixed Deposits

Our elders often advise us to create Fixed Deposits (FDs) whenever we have extra money lying around, saying it’s a safe way to save. But with changing times and evolving financial needs, are FDs still the best option? Let’s explore why mutual funds might be a better choice today.

What Are Mutual Funds and Fixed Deposits?

Mutual Funds are investment options that gather money from multiple investors to create a diversified portfolio, which is then invested in stocks, bonds, or other securities. The goal is to generate returns by investing in a mix of assets, managed by experienced fund managers. If you wish to know more, seek guidance from mutual fund advisors in Prayagraj.

Fixed Deposits (FDs) are savings options provided by banks, where you invest a specific amount of money for a set period at a fixed interest rate. Once the term ends, you get back your original investment plus the interest earned.

Reasons Why Mutual Funds Are Better Than FDs

Higher Returns Potential

Mutual Funds: Historically, mutual funds have delivered higher returns compared to FDs. This is because they invest in market-linked instruments like equities and bonds, which can generate significant gains over time.

FDs: Fixed deposits offer a fixed interest rate, which is often lower than the potential returns from mutual funds. While FDs are safe, their returns might not keep up with inflation.

Flexibility in Investment

Mutual Funds: You can start investing in mutual funds with small amounts through Systematic Investment Plans (SIPs), and there’s no lock-in period unless you choose tax-saving schemes like ELSS. You can invest or withdraw based on your financial goals.

FDs: FDs require a lump sum investment, and the funds are locked in for a fixed period. Withdrawing before maturity usually incurs a penalty, making FDs less flexible.

Tax Efficiency

Mutual Funds: Equity mutual funds held for more than a year qualify for long-term capital gains tax, which is lower than the tax on FD interest. Additionally, ELSS mutual funds offer tax deductions under Section 80C.

FDs: The interest earned on FDs is fully taxable as per your income tax slab, which can significantly reduce your effective returns.

Inflation Beating

Mutual Funds: The returns from mutual funds, especially equity funds, have the potential to outpace inflation, helping you preserve and grow your purchasing power.

FDs: The fixed interest rates on FDs may not always beat inflation, especially in a high-inflation environment, leading to a decrease in the real value of your savings.

Diversification Benefits

Mutual Funds: Mutual funds invest in a diversified portfolio of assets, spreading the risk across various sectors and instruments. This diversification helps in reducing risk while maximizing returns.

FDs: Fixed deposits are a single investment in one financial institution, meaning there’s no diversification. If the bank fails (though rare), your investment is at risk, limited by the deposit insurance cap.

Liquidity

Mutual Funds: Mutual funds offer high liquidity. You can redeem your units at any time, and the money is typically credited to your account within a few days. Some funds even allow partial withdrawals without any penalty.

FDs: With FDs, your money is locked for the tenure of the deposit. Early withdrawal can lead to penalties and a reduced interest rate, making them less liquid compared to mutual funds.

Professional Management

Mutual Funds: Your money in mutual funds is managed by professional fund managers who have expertise in selecting and managing investments. This gives you access to their knowledge and experience, which is especially beneficial for beginners.

FDs: FDs do not involve any professional management. Once you’ve invested, the returns are fixed, and there’s no opportunity for expert intervention to improve performance.

Conclusion

While FDs have long been considered a safe investment option, mutual funds offer a more dynamic and potentially rewarding alternative. You can even choose the best sip investment plan in Prayagraj if you don't wish to invest in lumpsum, they offer the power of compounding and the benefits of rupee-cost averaging with the convenience of disciplined investments with smaller amounts.