Comparison between Fixed deposit & mutual funds: which is better

Are you also confused that which source of investment is best? Should you invest in fixed deposit (FD) or mutual funds? Have a brief and descriptive comparison of fixed deposit and mutual funds to know that which is good and profitable for you.

If you want to invest for a time duration of one month up to two years, then you must want to know that which gives better return- Fixed Deposit (FD) or mutual fund. Let's read about this in detail.

Many investors assume mutual funds a source of long term investment. But actually, any investor can invest in mutual funds either for long term or for short term period. There are many types of mutual funds. Some of them are liquid mutual funds while other are suitable for very short term investment and some are income funds. Here is a brief description of these terms:

  • Liquid fund:
    If you want to invest your money for 3-6 months, then you can choose liquid mutual fund. The amount is matured within a maximum period of 91 days in the investment made under this fund.

  • Ultra-short fund:
    This type of fund is better if you have to invest money for about a year. Investment in shares though this fund is made in such a way that you can receive maximum return on it.

  • Short term fund:
    This type of fund is suggestible for investment exceeding the time duration of 1 year.

  • Income fund:
    Invest in income fund if you have a desire of regular and good income.

Fixed Deposit vs. Mutual funds

Mutual fund investment is made in those areas from where which are less risky rather than investing money in open market. Government institutions are also included in this. According to experts, if you want to invest your money for time duration of one month up to 2 years, then investment in short term mutual fund is better than investment in Fixed deposit. Fixed deposit investment is unable to pay you smart return on short term investment. On the other hand, top funds can give you return of 8%-9%. Scope of higher return in short term mutual funds is also high because it is easier to change its portfolio according to market conditions.

Such kinds of funds have one more benefit. They don't have exit load or the exit load is lesser than penalty to be paid on encashing the fixed deposit before maturity date.

Such mutual funds are also more income tax friendly. In case of fixed deposit, income from FD is accumulated in the salary of the investor for the purpose to calculate taxable income. On the other hand, tax is levied on income from mutual funds according to short term capital gain norms.

An important factor to be considered while selecting mutual fund is that you must consider that where the mutual fund invest your money. Check its credit rating. This will help you in calculating the risk factor involved in mutual fund investment.

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