Fixed Deposit vs Mutual Fund: Which Saving Scheme is Best in 2018?

Though fixed deposits continue to be one of the most preferred investment avenues for most Indians, mutual funds are slowly making inroads in the portfolio of retail as well as institutional investors. While SEBI’s survey found 95% of Indians preferring to park their money in fixed deposits, data from the Association of Mutual Funds in India (AMFI) reveals the assets under management of Indian mutual fund industry to have grown from Rs.7.61 trillion in July 2013 to Rs.23.06 trillion in July 2018. Read on to know which of these financial instruments happen to be the best saving plan in 2018.

Fixed Deposit vs Mutual Fund – What to Opt For?

Both fixed deposit and mutual funds have certain intrinsic characteristics and advantages that make them an ideal choice for investors.  

Advantages of Mutual Funds

• Start Investment with a Small Amount

Investment in mutual funds can be started with a small amount. Most mutual funds allow you to set up a systematic investment plan (SIP) with as little as Rs.500 per month. You can increase this amount with an increase in your salary or cash inflows. This flexibility allowed by mutual funds make them one of the best savings plans in India.

• Potential Inflation-Adjusted Returns

With inflation eroding the value of wealth with time, it’s imperative to look for alternative investment avenues that have the potential to generate inflation-adjusted returns. This is where mutual funds, especially equity-oriented funds, score over other asset classes since they have the best potential to generate inflation-adjusted returns in the long run.

• Flexibility to Choose Funds as per life Goals

You can choose to invest in a range of mutual funds as per your life goals. For example, while liquid funds can be used to park money for an emergency, ultra-short duration funds are ideal for meeting short-term goals such as going on a vacation, home renovation, etc. On the other hand, equity funds work best for meeting long-term goals such as a child’s higher education and retirement. Also, with SEBI’s recent reclassification exercise, mutual funds have become much more transparent, giving you an insight into a fund’s investment objective.

Advantages of Fixed Deposits

• Assured Returns

Assured and guaranteed returns from fixed deposits make them one of the best savings options in India. The investment made in a fixed deposit is latent to market volatility and in case the markets turn sour, your corpus doesn’t take a dip.

Of late, fixed deposit interest rates have started climbing after years of decline. Notably, fixed deposits by non-banking financial companies (NBFCs) offer higher rate of returns than the market average. This makes fixed deposits an ideal instrument for addressing short-term goals.

• Easy to Understand

Fixed deposits are one of the easiest financial instruments to understand. You don’t need to have a deep understanding of the underlying assets unlike other investment avenues to choose a best fixed deposit plan. All you need to do is to walk in to the branch of the financial institution, fill up the fixed deposit form and within minutes your FD certificate outlining the principal amount, rate of interest, tenor and maturity amount is handed to you. If you have net banking, you can also avail an FD, in a few clicks from the comfort of your home or office.

• Premature Withdrawals

Most fixed deposits offer premature withdrawals. It means you can break your fixed deposit prematurely before its tenor, in case you need funds for an emergency. This facility makes a fixed deposit one of the best saving schemes in India. However, note that certain types of deposit, such as a tax-saving FD, can’t be broken prematurely.

As evident, both fixed deposits and mutual funds are ideal saving schemes for meeting various life goals. The choice of investing in either, depends on your financial goals, risk appetite and investment horizon.