With the onset of a new financial year, the quest for the right financial instrument has intensified. While there are numerous financial tools for you to invest in, finding the right investment can be quite tricky. Having said that, the current market is brimming with investment opportunities that cater to all kinds of investors.

Among available financial tools, fixed deposits (FDs) and mutual funds are most sought after for their high returns. However, it is imperative that we know the perks each of these options bring to the table, in order to make an educated decision.

You might be filled with a raging curiosity to see an FD vs mutual fund comparison so as to get a clearer perspective. This will help you in mapping out an investment strategy to grow your savings in an upward fashion. Here’s a quick glimpse at each of them and the features they entail:

Fixed Deposits

Fixed deposits or FDs are saving instruments that offer dual benefits of high interest rates and enhanced safety. If you are someone that wishes to venture into the financial market without undertaking major risks, an FD is an ideal choice for you. Through an FD you will be able to lock your savings for a fixed period of time while earning attractive returns on them.

FDs are a secure savings option since they are unaffected by any volatility in the market. This implies that the interest rate decided at the beginning of your tenor will remain the same throughout, despite market fluctuations. Moreover, FDs give you the flexibility to opt for a tenor that suits your financial requirements and can be used to optimise your returns.

The interest on an FD differs on the basis of two parameters, namely, age and tenor. The tenor you opt for plays a vital role in determining the interest rate. Similarly, age is also an equivalent factor that determines the rate of interest. Most financial institutions offer a 0.50% hike in the interest rate for senior citizens. The high interest rates offered by FDs will help you build your corpus substantially over the chosen tenor.

In addition to these perks, an FD can be tailored to meet your needs, depending on how frequently you’d require your interest payouts. This can be done by either opting for a cumulative or a non-cumulative FD, based on when you wish to receive your payouts. Under a cumulative FD, your savings will grow over time and the accumulated amount will be paid out to you with interest at maturity. On the other hand, under a non-cumulative FD, you can receive the interest payout on a monthly, quarterly, half-yearly or annual basis.

Mutual Funds

Mutual Funds are investments best suited for you if you have a higher appetite for risk. Under such an investment, the accrued amount from various investors is pooled together and invested in various securities like bonds, stocks and so on. Since these investments are in direct contact with the market, they are prone to market volatility and attract higher returns as well.

If you’re just starting your investment journey, it is advisable that you begin through SIPs or Systematic Investment Planning. Under such an approach, you can start out by investing a smaller amount for a particular period of time than investing a large amount.

On the basis of your financial needs, there are a variety of mutual funds that you can opt for to derive maximum returns. Among popular mutual funds are equity mutual funds and debt funds. Equity mutual funds generally invest in the stock market since they aim for capital appreciation. Debt funds aim at generating income and therefore, invest in bonds and money markets. Each of these types have their fair share of risks. Hence, it is crucial that you invest as per your risk appetite.

Mutual funds are handled by expert financial analysts who have observed the market for years and have researched every aspect possible. Hence a mutual fund manager is well aware of the trends in the market and can be relied on for expert management. Additionally, such a practice helps you inculcate a disciplined investment behaviour.

Investing in FD vs Mutual Fund:

While both these financial instruments are beneficial in their own way, there are a few major differences that you might need to consider. This could help you pick the one that aligns the most with your financial goals.

The Return on Your Investment

Mutual funds generally provide a higher rate of return when compared to FDs. Nonetheless, the interest on an FD remains fixed and is devoid of market fluctuations, therefore offering you assured returns.

Capital Appreciation

Mutual funds are known for their high capital appreciation. Be that as it may, FDs help you secure guaranteed returns as well as build your corpus.

Liquidity

The open-ended schemes under mutual funds do not have any lock-in period. Hence, they offer a higher liquidity than FDs do. However, such a withdrawal might incur exit loads that will add up to the cost of your investment. In the case of FDs, you can choose to get a loan against your FD, to help you resolve your immediate financial requirements. This will not entail any additional costs.

Governing Authority

Both FDs and mutual funds are highly regulated in order to safeguard the interest of those that wish to save through or invest in them. The Reserve Bank of India is the regulatory board for a FD. Whereas, SEBI or Securities and Exchange Board of India is the body that governs mutual funds.

Risk Appetite

If you’re someone that has a higher risk appetite, mutual funds are a good choice for you. Due to their direct association with the market, mutual funds are subject to constant fluctuations. FDs are relatively safer and do not involve any risks.

Having read through a comprehensive breakdown of both FDs and mutual funds, you should now be able to make the right investment decision. A thorough analysis of your financial goals and a comparison of your expectations from the respective financial tool could help you acquire optimal returns.