Fixed deposits have been popular because these are safe investment options that offer assured returns. However, today you can choose from various products, such as mutual funds, equities, and many more.
A common question is whether mutual funds are better than fixed deposits. Before finding the answer, it would be beneficial to understand the two products.
Fixed deposits (FDs)
When you open a fixed deposit, you know the exact returns that you will earn at the end of the investment period. Irrespective of the changes in the market, your returns are predetermined.
Institutions like Mahindra Finance offer promising interest rates on FD. The fixed deposit documents required by the issuer vary according to the type of investor. For instance, individuals need to submit different documents compared to companies.
Mutual funds (MFs)
MFs are market-driven investments and do not guarantee secure returns. However, they often deliver higher returns over the longterm. You can invest in debt, equity, or balanced funds based on your requirements and risk profile.
Debt funds invest the corpus in government and corporate bonds and securities. Conversely, equity funds primarily invest in the stock market. Balanced funds distribute the corpus between bonds and stock market investments.
Differences between FDs and MFs
- Investment returns
The FD rates are locked and do not change during the entire investment duration. MF returns are driven by market movements and are uncertain.
- Rate of returns
The rate of return for MFs depends on the form of fund and market performance of these assets. In comparison, the FD interest rate depends on the type and tenure of the deposit, and it does not change.
FDs are one of the safest investment products with nearly no risks. However, MF investments are risky, as the returns are market-driven, and an unfavorable movement can result in significant losses or lower returns.
- Inflationary impact
Because the rate is set when you open the FD, there is no effect of inflation on your returns. However,MF returns are adjusted for an inflationary increase. Therefore, these instruments can give higher returns.
FDs have a certain pre-defined tenure and are less liquid. You can withdraw the amount before maturity, but you may have to pay a penalty. MFs are liquid investments because you can buy and sell these in a short duration without any penalties.
Deciding on which is a more suitableavenue depends on the available principal and risk appetite. If you plan to investfor a long period and are willing to take risks, MF may prove to be a valuable instrument. However, if you are looking for risk-free returns, invest in FDs. Visit the Mahindra Finance website and check the FD documents needed by the issuer.