Fixed Deposits vs Mutual Funds
How should one save money? It is a difficult job for a newbie; Fixed Deposit is the most obvious solution, but, should Mutual Funds be ignored or should one dive into the world of equities?
To save money the most traditional and the obvious instrument has been Fixed Deposit (FD) but as rates reduce for fixed income products, one wonders whether taking a calculated risk is worth it? Should one look to invest in equities via Mutual Funds? After all FDs are done for long time periods as well. They are renewed and FDs continue for 5-10 years easily. Should this money be going towards Mutual Funds instead? Mutual Fund investing has become comparatively easier over the years. One can start an SIP with as little as Rs.500 in most mutual fund schemes and enjoy the benefits of compounding.
SIP means Systematic Investment Planning, think of it like a Good EMI, money gets debited automatically every month at a designated date and gets invested into your preferred scheme. In this article, my focus will be on equity mutual funds and not on the other varieties. You may ask why is this the case? The answer is simple, most FDs are done for the long term, which is exactly how mutual fund investing should be done.
Saving vs Investing
FD means savings, it means that you will give money to the bank and the bank will further lend it out to different businesses and the difference in the rate of interest that the bank charges other businesses vs the rate of return it provides you is the income for that particular lending institution.
Mutual Fund means investing, you give your money to a fund manager who is running a particular scheme and they decide where they will allocate this money, they may buy stocks, commodities, bonds, etc. For the ease of discussion, we will keep it to equities only in this article.
Fixed Deposits are Safe
Fixed Deposits give the promised returns; however these returns are very low as they are guaranteed returns, you will see most FDs today are at 5% p.a. returns.
Mutual Funds are subject to Market Risks
Mutual Funds are subject to market fluctuations in the stock prices, hence their Net Asset Value (NAV) keeps on fluctuating up and down all the time. In the short term the volatility can dampen your returns, but as soon as you have a longer horizon (3 years+) you will see superior returns. One can expect returns that compound at 12% p.a. in the Indian Equities Market.
Safety vs Returns
The major debate comes to this point only. People want safety of the money. For short term, Fixed Deposits are good as your principal amount is safe but in the longer run, you are essentially paying to keep your money safe as the returns are extremely low (sometimes not even beating the inflation).
Investing in mutual funds can be risky in the short term but as soon as you expand your time horizon, you see yourself making a lot more money.
Thought: Not investing money in mutual funds and keeping it in FDs (for the long term) is more injurious to your wealth. You may even lose your Principal amount as it depreciates due to inflation.
Open your demat account with Upstox to start investing in equities.