Comparing Mutual Funds and Fixed Deposit? The Right Choice for You
Fixed-income investment vehicles like Bank fixed deposit schemes have been the all-time favorite choice of investors in the UAE for generations. The idea that my hard-earned savings are safe with a financial institution sounds more substantial than high returns. However, with the changing era and emergence of the UAE as a business hub, the investment market has grown rapidly.
Now investors are looking for easy to manage and high return yielding modern-day instruments like mutual funds. Anyone who is looking forward to making a short-term investment with a growth rate of 6-9% should invest in mutual funds. The return on a bank fixed deposit for the same period of time would be approximately equivalent to 6-8%. The figures are almost the same, and the question arises mutual funds or fixed deposits?
In the face-off between mutual funds and Fixed deposit, if we compare the returns obtained in a period of one-year, mutual fund investments have an edge over bank FD’s. When it comes to the risk factor fixed deposits are much safer in comparison to mutual fund investments. The perfect investment instrument would vary from person to person and hence it should be the choice of investor based on factors like return on investment, degree of risk, liquidity, and time horizon.
Return on investment
Returns on investment are a major decisive factor, and they work in favor of bank fixed deposits because there is a guaranteed return. Furthermore, an investor has an accurate figure of return that will be obtained on investing over a given period. The rate of return varies from bank to bank over the money invested in a time frame. The assured rate of interest is paid on the principal amount by the bank to investors when the deposit matures.
Contrary to this, mutual fund investment comes with no guaranteed returns as they do tend to change with market swings. This does not necessarily mean that returns obtained by investing in mutual funds will always run towards the negative side. Instead, there is a very high probability that you might end up getting high returns in the long run when compared to fixed deposits.
If your desired investment period is between 2-4 years then debt-based mutual funds are the right choice. The return for both the tools i.e. FD and mutual funds are almost the same but the latter comes with no lock-in period. Thus, investing in mutual funds provides more liquidity.
Degree of Risk
One of the primary factors in choosing any mode of investment is the degree of risk which determines how safe the investment actually is? From that point of view, fixed deposits are more secure as there is a guarantee from the bank which assures that the investment remains safe. On the other hand, in the case of mutual funds, there is a degree of risk that is associated as the returns are dynamic depending on the market circumstances. Practically, a loss in only possible if one decides to withdraw the invested capital considering the market fluctuations.
Both equity and debt mutual funds are highly liquid, and can be redeemed instantly anytime with a click of a button and your earned capital will be transferred to the designated bank account. Moreover, in the case of most of the debt funds, there is no penalty charged on redeeming the amount. However, when it comes to fixed deposit redeeming the invested amount before the maturity will lead to the implication of a penalty.
To understand this let us consider an exemplary situation, suppose you redeem your deposit in the third year and the maturity period is five years then the interest payable by the bank on the principal will be for a period of three years instead of five years. Plus, you will end up paying penalty over top of this. Thus, in terms of liquidity investing in mutual funds turns out to be the right choice.
Another important factor that is detrimental in choosing between investing in mutual funds and fixed deposits is the time horizon of the investment tool. In case of mutual fund investments, the time period is usually short i.e. 6 months-2 years. On the other hand, fixed deposit investments are made for a longer period i.e. 2 years to 10/20 years based on the choice of the investor and their goals.
In a Nutshell
One should choose an investment vehicle after analyzing its goals and objectives over a period of time along with factors like liquidity, risk tolerance, and returns. After shortlisting the investment make a statistical comparison between the chosen modes. With these factors into consideration, it will become easier for you to compare and choose the right investment tool that will give wings to your dreams in life.