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Things to know about FDs and MFs before you begin investing in these instruments
As a new investor, you may consider investment options such as Fixed Deposits (FDs) or Mutual funds (MFs). Both of these options work different and are used for different financial objectives. It’s important to be aware of both the financial instruments and the key differences between FD and mutual funds.
A Fixed Deposit (FD), also called a term deposit, is a saving instrument that lets you invest a lump sum for a fixed tenure at a predetermined interest rate. The interest rate on FDs varies from bank to bank . Since the returns are not market-linked, fixed deposits are considered a relatively safe, risk-free option. Many banks now allow to directly open an FD if you are using an online savings account.
Fixed deposits are insured up to INR 5 lakh per depositor per bank under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Deposit Insurance Scheme by the RBI, in case the bank fails.
A mutual fund is a market-linked investment instrument where returns depend on the performance of underlying assets such as stocks, bonds, gold, or other securities.
An asset management company (AMC), also referred to as a fund house, pools money from several investors in a mutual fund and invests it across a diversified portfolio based on the fund’s objective. These investments are managed by professional fund managers who make allocation and strategy decisions.
It is different from putting your money into purchasing shares of a company. The funds are invested across asset classes in an MF, increasing the diversification in one's portfolio.
There are three broad categories of mutual funds:
By understanding the differences between fixed deposits vs mutual funds, you can make more informed investment decisions. Here is a clear comparison of how these two instruments differ.
Factors
Fixed Deposits
Mutual Funds
Returns
Assured Returns fixed by the Bank
Market-Linked Returns based on the fund’s performance and market trends.
Risk Comparison
Low, since the fund is deposited with a bank.
High, as the NAV units purchased by your investment can fluctuate based on market movements.
Taxation
Interest earned on your deposits in an FD is taxable as per the income tax slab.
The returns are taxable under capital gains tax. The rates of taxation depend on the holding tenure.
Liquidity and Withdrawal Rules
Limited Liquidity with option of partial withdrawals
High Liquidity, open-ended mutual funds can be withdrawn on any business day at the applicable NAV.
Investment Horizon and Lock-in Period
FDs offer a specific tenure, ranging from 7 days to 10 years or more. Some FDs, like tax-saving FDs, have a mandatory lock-in period during which premature withdrawal is not allowed.
Mutual funds have a more flexible investment horizon; certain funds, such as ELSS, have a fixed tenure of three years.
Regulation
Fixed Deposits are regulated by the Bank and RBI
Mutual Funds are regulated by SEBI.
Note: The information provided in this table is for general informational purposes only. For specific guidance or details, please consult with your Relationship Manager or a relevant expert.
Mutual Funds:
Fixed Deposits:
When comparing FDs vs. mutual funds, it is essential to assess your financial goals, investment horizon, and risk tolerance. Fixed deposits offer capital stability and predictable returns, while mutual funds provide market-linked growth potential over the long term. Open a savings account with DBS Bank, making it easy to manage your personal finances and access investments and savings instruments through the DBS digibank app.
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