As an investor, it is inevitable to eschew the tug of war of determining the best investment. It is easy to be swayed away by popular opinions or trends without looking into one’s financial goals or risk appetite.
Two of the prominent investment tools preferred are fixed deposits and mutual funds. Despite their distinct differences, both the investments are covered under tax deduction of Section 80 C of the Income Tax Act 1961.
Devised below is a comprehensive guide on fixed deposits and mutual funds intended to assist every investor and why FD pioneers as a better choice.
- Fixed deposits are deposits made with the bank or financial platforms for a stipulated period over a fixed rate of interest.
- The tenure for fixed deposits generally varies from 1 year to 5 years. However, some NBFC platforms also provide a flexible tenure of 7 days to 10 years to converge with the customer’s varying requirements of short and long term investments.
- The interest rate for fixed deposit is higher than the savings account with current fixed deposit interest rates ranging from 4% to 8%. Specific non-banking financial platforms such as PNB Housing Finance provides the best FD interest rates upto 8.40% on its FDs.
- FDs are low risk owing to its independence to economic climate variations.
- Investors can choose payout frequencies through cumulative and non-cumulative options.
- Senior citizens are eligible for senior citizen FD rates higher than regular deposits. In PNB Housing Finance, for example, senior citizens are eligible for a 0.25% higher interest rates
- The premature withdrawal facility is a boon to investors during financial crunches. However, penalty charges will be charged based on the lender.
- Loan against FD is a hassle-free loan provision where investors can obtain a loan of upto 70% to 90% of their deposit amount. The interest rates on such loans are 1% to 2% higher than the fixed deposit rates. At PNB Housing Finance, for example, investors can avail upto 75% of their deposit amount. Since the FD acts as a collateral, these loans are secured and flexible.
- A mutual fund is a professionally managed investment tool where investors pool in money with a common goal. Investment is made in equity, bonds etc.
● The interest accrued is distributed among the investors after deducting the expenses incurred
● A high-risk investment tool where the income is susceptible to economic weather. During a favourable stock performance, investors earn high returns.
● Premature withdrawal is allowed only after the completion of the minimum holding period.
● All mutual funds are subject to short term and long term capital gains tax.
● Investors who hold mutual funds will have to bear the mutual fund charges in the form of shareholder transaction costs, investment advisory fees, marketing, and distribution expenses.
Fixed deposits offer safety over the principal amount along with guaranteed returns. With added benefits of premature withdrawal and loan against FD provisions, it stands out as a better choice of investment.