“Money is usually attracted, not pursued.”
You want to grow rich? Make sure money is attracted to you. If you pursue money….it usually runs away from you. How do you attract money? Simple….Invest in knowledge and money will chase you. Let’s take a look at whether fixed deposits are a better investment, or mutual funds, win the day. In fixed deposits vs mutual funds, which one to choose?
Households in India, love to invest in fixed deposits. Fixed deposits offer a sense of security. Your money is safe. You also get interest on your money. But there’s a problem. In these days, banks are not offering high interest on FD’s. Inflation is eating up the returns from your fixed deposit. Tax eats up what is left behind. So is an investment in fixed deposits really good, or should you look at mutual funds?
You invest money in a fixed deposit with a bank. The money you invest called the principal, is very safe. (You will not lose this money). You also earn interest on your money. The interest paid to you, is compounded quarterly.
A mutual fund in India, collects and pools your and other investor’s money. This money is invested in stocks, if you choose an equity mutual fund. It is invested in government bonds, corporate bonds and money market instruments, if you choose debt funds. Your money is invested in a mix of equity and debt, if you choose hybrid funds.
Your total investment in the mutual fund, either in stocks, bonds or a mix of both, is divided into units. You are given units of the mutual fund, depending on the cash you invest. The NAV (Net Asset Value), gives you the value of the mutual fund. Your mutual fund is managed by a fund manager. The fund manager decides which stocks, bonds or assets, your money must be invested in, depending on the type of mutual fund you choose.
Let’s compare fixed deposits vs equity mutual funds. Equity mutual funds, invest your money in reputed stocks. Equity mutual funds are known to give high returns, but at high risk. They are affected by the movements in the stock market. When stock markets do well, you get good returns. When stock markets fall, you could lose a lot of money.
Fixed deposits remain unaffected by market conditions. Movements in the stock market, do not affect FD interest rates.
Debt mutual funds, invest your money in government bonds and corporate bonds. While government bonds are extremely safe, corporate bonds can be risky. Corporate bonds which have low rating, offer higher interest. However there is a risk of a default. Still debt mutual funds are considered, a safe investment in India.
When interest rates are going down in the economy, (repo rates are cut by the RBI), debt mutual funds give good returns. Banks on the other hand, offer lesser interest on FD’s, when repo rates fall. If you are willing to take a slightly higher risk, invest in debt mutual funds, instead of fixed deposits.
Fixed deposits are safer than debt mutual funds.
If you invest your money in a debt mutual fund, the returns/profit you get, are called capital gains. If you stay invested for more than 3 years, the returns you get, are called long term capital gains. Your long term capital gains are taxed at 20%, with indexation. Indexation benefit can make the post-tax return of debt funds, far superior to fixed deposits. With indexation benefits, you have to pay tax, only on what you really gain. Short term capital gains (less than 3 years) are taxed, as per the income tax bracket you fall under.
“You are the master of your destiny.” You invest your money, depending on the amount of risk, you are willing to bear. You also need to take a look at the time horizon (time you are willing to stay invested), in FD vs mutual fund. Come what may; never lose money in your investment.
RULE NO 1: NEVER LOSE MONEY.RULE NO 2: NEVER FORGET RULE NO.1.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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