In this video, we will be talking about two very popular investment avenues – mutual funds and fixed deposits.

In this video, we will be talking about two very popular investment avenues – mutual funds and fixed deposits. We will compare both these products to understand them in more detail in terms of characteristics and risk.

Let us understand their exact definitions first. A mutual fund is a basket of financial securities that is professionally managed by experts known as fund managers. A fixed deposit is a fixed sum of money that we deposit in a bank so that we can earn interest on it for a fixed period of time.

Now, let’s discuss their risks and returns.

Returns from a mutual fund are directly linked to the market performance of the securities in the fund. Similarly, each fund offers a different level of risk, depending on the securities it contains.

Fixed deposits, on the other hand, are not directly linked to the stock market. Therefore, their returns are pre-determined and fixed, and they have much lesser risk. Next, let’s compare the expenses incurred in these investments. Mutual funds involve multiple expenses which are deducted from an investor’s total profit. These expenses are deducted to ensure the smooth functioning of the mutual fund.

On the other hand, since fixed deposits require minimal management, there are no additional costs involved. Now, let’s talk about the taxations on these investments. The profits made from mutual funds are subject to capital gains tax on a short-term and long-term basis. Fixed deposits are subject to a 10% tax deducted at source or TDS, on the interest earned above ₹10,000, on a yearly basis. Now that we’ve understood some basic features of these investments, it’s time to answer the question – which instrument works?

As we can see, mutual funds and fixed deposits are very different in nature and hence there is no specific answer to which is better of the two. Both are suitable for different types of investors; depending on the risk appetite of the customer.

If you are looking for a low-risk way of growing your wealth on a constant basis, fixed deposits are the best investment for you. On the other hand, if you aim to generate high returns on your investment, and you have a higher risk appetite, you should definitely try out mutual funds.

These investments have disadvantages as well.

Mutual funds might offer higher returns, but these returns are neither fixed nor guaranteed. On the other hand, while fixed deposits have defined return, their effectiveness can be reduced by inflation.

For example, suppose a fixed deposit of 3 years offers a return of 6%. If the inflation after the 3 years is 7%, it means that your effective returns have become -1% after adjusting for inflation.

So, the answer to the question – which investment is better – will depend on factors like the current interest rates, the current state of the stock market, and most importantly, your risk-taking ability.