Mutual funds or term deposits: which is better to invest your income?
Bank FDs offer the certainty of guaranteed returns, along with the knowledge of how much you would get as a return amount at the time of investment. Different banks offer different rates of return on investment for different periods. In this case, if you put a given sum of money in a FD bank for three months, the interest rate will be lower than if you invest it for a year. The bank, on the other hand, agrees to pay the interest rate that it agreed to pay throughout the period during which the money was invested.
Meanwhile, there are no guarantees of guaranteed returns with mutual funds, and the amount of return may fluctuate depending on market conditions. This does not mean that returns will always be bad. In fact, compared to FD returns, the odds of receiving larger returns from mutual funds are significantly higher over the long term. Mutual funds are the best alternative if you want to make a short-term investment.
As the name suggests, fixed deposit is fixed, which means that liquidity in FDs is not easy. You will have to pay a penalty if you want to redeem a Fixed Deposit before it matures. In addition, the penalty will be removed from the refund.
Mutual funds, on the other hand, are extremely liquid. Its shares can be redeemed at any time with just a few clicks of the mouse, and the funds will be paid into the selected bank account within two to three working days. In reality, some debt funds do not have an exit charge when cashed in.
One of the most important advantages of FDs is the assured security element; nevertheless, in case of bank failure, you will only get the insured amount, which can be up to Rs 5 lakh. That is, even if you invest Rs 10 lakh, you will receive Rs 5 lakh, which is the guaranteed amount in case the bank fails.
Meanwhile, even though the minimum return level of the mutual fund is not guaranteed, a loss is only conceivable if an investor decides to redeem the money based on market movements.
The tax percentage is determined by your income slab in the case of bank DFs. This implies that if your tax bracket is below 20%, your FD returns will be taxed at 20%.
Long-term capital gains, on the other hand, are valued after an investment in a debt fund has been held for three years. As a result, you will have to pay a 20% tax, but your debt fund investments will benefit from indexation. The government offers indexing to mutual fund investors as a type of tax relief.
The short-term gain of mutual fund returns, that is, income from investments less than three years old, is taxed and added to the investor’s annual income.