In 2024, choosing the right investments to grow your money is crucial. With so many options, it can be hard to decide what’s best for you. Two popular options are fixed deposits (FDs) and mutual funds. Each has its own advantages and caters to different types of investors. Fixed deposits are great if you want a safe investment. They offer guaranteed returns, making them perfect for those who prefer a stable, low-risk option. Mutual funds, on the other hand, can give you the chance for higher returns by investing in a mix of stocks and bonds. They tend to attract those who are willing to take on a little more risk for the chance of better growth.

Fixed Deposits vs Mutual Funds

When deciding where to invest your money, fixed deposits (FDs) and mutual funds are two popular options. Each has its own advantages and disadvantages. Let’s break down the differences to help you choose the best option for your needs. Returns One of the first things people look at is how much money they can make.

• Fixed Deposits:

FDs have fixed interest rates, which you know in advance. Typically, interest rates range from 5% to 7% per annum.

Example:

o Investment amount: ₹1,00,000
o Interest rate: 6% per annum
o Tenure: 5 years
If you invest ₹1,00,000 at 6% interest rate for 5 years, you will get around ₹1,33,820 on maturity. This means you will get around ₹33,820 in interest.

• Mutual Funds:

Mutual funds can typically offer higher returns between 10% to 15% per annum, depending on how the market performs.

Example:
o Investment amount: ₹1,00,000
o Expected return: 12% per annum
o Tenure: 5 years
If you invest ₹1,00,000 in a mutual fund with a 12% return for 5 years, you can get around ₹1,76,228. This means you will make a profit of around ₹76,228.

Risk factors

Understanding the risks involved is important for your investment choice.

• Fixed deposits: FDs are considered low-risk as your money is safe. Even if the bank has a problem, your investment is insured up to ₹5 lakh, so you won’t lose your principal.

• Mutual funds: Mutual funds are more risky as they depend on the performance of the stock market. Your investment can go up or down, which means you can earn less or even lose some money. However, if you invest for the long term, you can usually handle this risk.

Liquidity

Liquidity refers to how quickly you can access your money.

• Fixed deposits: While you can withdraw your money before the term ends, this usually comes with penalties and lower interest rates. This makes FDs less flexible if you need cash immediately.

• Mutual funds: Mutual funds are generally more liquid. You can sell your units and get your money back in a few days, making it easier to access your funds when you need them.

Tax implications

Taxes can affect your overall returns, so it’s essential to understand how they work.

• Fixed deposits: The interest you earn on FDs is taxed based on your income tax slab. If you earn interest of more than ₹40,000 (₹50,000 for senior citizens), TDS will be deducted.

Example: If you have earned ₹33,820 interest and are in the 20% tax bracket, you will have to pay ₹6,764 as tax. This gives you a net return of around ₹27,056.

• Mutual Funds: Tax on mutual funds depends on how long you hold your investment. If you hold equity mutual funds for more than a year, you will have to pay 10% tax on gains above ₹1 lakh.

Example: If you earn ₹76,228 from mutual funds after 5 years, you will not have to pay any tax as it is within the ₹1 lakh limit.

Investment horizon

Your investment time horizon will also help you decide.

• Fixed deposits: FDs work well for short to medium-term investments. If you have a specific goal in mind, such as saving for a wedding or vacation in a few years, FDs can give you a stable return.

• Mutual funds: If you are investing for the long term (5 years or more), mutual funds are often better because of the higher growth potential.

Conclusion

To summarise, both fixed deposits (FDs) and mutual funds have their pros and cons, making them suitable for different types of investors. If you want a safe place for your money, with guaranteed returns and no risk to your capital, fixed deposits are great. This makes them perfect for people who like stability and are looking for short-term savings.

Mutual funds, on the other hand, can offer higher returns because they invest in a wide range of assets. They are managed by professionals and can be a good option for people willing to take some risk in the hopes of growing their money over time.