FDs, Savings A/c and Mutual Funds are ubiquitous terms now.
When it comes to managing and growing savings, an investor must know the various categories of investment. The three most common financial instruments are Fixed Deposits (FDs), Savings Accounts, and Mutual Funds.
This blog explores the characteristics, advantages, and differences of FDs, savings accounts, and mutual funds to help investors determine which one aligns best with their goals.
What are Fixed Deposits?
Fixed Deposit also known as a Term Deposit or Saving deposit is a low-risk investment tool involving a deposit of a certain sum of money to a bank or financial institution for a specified period.
In exchange for this service, the institution agrees to pay the depositor an FD interest rate on the deposit for the selected period.
The term for an FD can be as short as a few days or can stretch up to several years, which generally has slightly higher FD interest rates than a normal savings account.
Advantages of Fixed Deposits
- Low-Risk Investment: FDs are considered one of the safest investment options since they are insured by the DICGC for up to ₹5 lakh per depositor.
- Fixed Returns: The interest rates on fixed deposits are determined at the time of deposit and remain constant till the maturity of the investment.
- Flexibility in Tenure: When selecting tenure, depositors can decide to go for either a short-term or long-term plan.
- No Market Risk: FDs are for risk-averse investors because the FD rates are not determined by market forces but are pre-set at the time of investment.
- Tax Benefits: The tax-saving FDs that have a maturity tenure of 5 years or more are eligible for tax deductions under Section 80C of the Income Tax Act.
What is a Savings Account?
A savings account on the other hand is a bank deposit account through which an individual can earn an interest on the amount deposited.
The interest rates offered in savings accounts are not very high but it allows for easy access to the money.
Savings accounts are very popular because one can withdraw money at any given time with no restrictions or deductions.
Advantages of Savings Accounts
- Liquidity: Savings accounts are the most liquid financial assets since an account holder can withdraw cash at any time without limitations.
- Safety: Savings accounts also present relatively low-risk investment options if opened with banks under the DICGC which provides insurance up to an amount of ₹5 lakh per depositor.
- Easy Access: Depositors can easily withdraw their savings by using ATM cards, online banking, or directly going to the branch.
- Interest: Despite the interest rates being a little low compared to other banks (the interest rates ranging between 3-4%, they are much higher than what one would earn by putting cash in the comforts of their home.
What are Mutual Funds?
A Mutual Fund is a professionally managed investment instrument that enables investors to pool their money together and invest it in stocks, bonds, and other securities.
Mutual funds are organized and managed by a qualified fund manager on behalf of the investors.
Based on the types of securities, mutual funds can be broadly categorized into equity funds, debt funds, hybrid funds, and sector-specific funds, depending on the underlying assets in which they invest.
Advantages of Mutual Funds
- Liquidity: Although mutual funds are not as liquid as savings accounts. Most equity mutual funds have provisions that enable an investor to exit the fund on any business day.
- Higher Returns: In this respect, equity mutual funds and other mutual funds provide a chance for much higher returns than FDs or savings accounts, especially for long-term investing.
- Diversification: Since the money is collected from various investors, mutual funds give investors a chance to invest in various securities, thus minimizing personal risk.
- Professional Management: Mutual fund investments are managed by professional fund managers, who have the experience and expertise to select securities appropriate for the investors’ needs and risk appetite.
- Variety of Options: Mutual funds are classified into different types and categories, depending on the risk exposure and the investor needs, like equity funds are designed for long-term capital appreciation, debt funds for stability, and hybrid funds are a combination of these two.
Conclusion
Savings accounts, FDs, and mutual funds all play distinct roles in a well-rounded financial plan. The choice between Fixed Deposits, Savings Accounts, and Mutual Funds depends on an individual’s financial goals, risk tolerance, and time horizon.
Savings accounts are for short-term liquidity, FDs are for stable returns over a fixed period, and mutual funds are for long-term wealth creation.
Understanding the advantages and disadvantages of each option will empower an individual to make informed decisions and choose the right instrument to achieve their specific financial goals.
