Mutual Fund v/s Fixed Deposit Returns.

Fixed Deposit :

  • People often opt for fixed deposits (FD), considering them to be risk-free. The security of having money in the bank is apparently a significant factor and with FDs, it is highly unlikely that you will lose your money. However, with other factors at play, notably inflation and taxes, do FDs provide more bang for your buck?

Mutual Fund : 

  • A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.
  • Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.

Features of Mutual Funds

  • Allows one to take exposure to equity, debt or commodities(gold)
  • Industry regulated by Securities & Exchange Board of India (SEBI)
  • Payout of dividend or re-investment possible
  • Redemption can be instant, or between 1 to 3 days.
  • May/may not have exit loads

Features of Fixed deposits

  • Fixed rate of interest
  • Interest options to be payout at defined frequencies or at maturity
  • Auto-renewal possible
  • Can go from short tenures to long term (5 years or more at times)
  • Insured upto only INR 1 lakh.
  • Can have pre-mature withdrawal penalty.

A quick comparison: Mutual funds vs. Bank FDs…

 Investing in mutual funds offer advantages:

✓Facilitates diversification;
✓The minimum investment amount required is low;
✓Offers economies of scale, translating into better returns for you;
✓Offers innovative modes of investing and withdrawing – Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), Systematic Withdrawal Plans (SWPs), etc.;
✓You can tactically allocate your investible surplus; and
✓Your hard-earned money is professionally managed by professionals who hold years of experience in financial research and fund management.

As you can see, mutual fund returns beat fixed deposit interest by a wide margin in the bull market years, But what happened in the bear market years? The table below shows 5 year growth of Rs 10,000 investment, made at the end of various years from 2001 to 2008.

All investments made after 2003 (shaded in amber in the table above) had to go through bear markets of either 2008 or 2011 or both. Now, please take a look at the line “Capital Gain / (Loss). Investors with a five year horizon did not make a loss in the above example.

The investment decision of the investor should be governed by his or her risk tolerance and not risk appetite.

We have shown that if the investor remains invested for a sufficiently long time horizon, equity funds can give good returns despite difficult market conditions. To Invest in Mutual Funds visit : www.gfswc.com or Call : 8010926281.

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