Where should I invest for financial growth-Fixed deposit or Mutual funds?

Knowledge of capital markets and how assets are priced is essential to decision-making that involves investing capital. These decisions include capital budgeting—that is, whether or not to invest in specific long-lived projects—and analyzing the management of current assets and risk management. But when your objective is financial growth, you should first determine the value of your investment and then its yield. Investment decisions are concerned with the use of funds—the buying, holding, or selling of all types of assets. A good strategy of investment includes

• setting investment objectives,
• establishing an investment policy,
• selecting an investment strategy,
• selecting the specific assets, and
• measuring and evaluating investment

The notion that money has a time value is one of the most basic concepts in investment analysis. Making decisions today regarding future cash flows requires understanding that the value of money does not remain the same throughout time.

It is this element of time that raises the question whether it is wise to invest in fixed deposit or in mutual funds if one’s aim is financial growth. The uncertainty that comes along with mutual funds makes people refrain from investing in them, and instead go for fixed deposits in their banks. But, for those who have faith in their decision making, have knowledge, and are really good at analyzing market trends, investment in mutual funds is the best option for them. One rupee one year from now is not as valuable as one rupee today. After all, you can invest a rupee today and earn interest so that the value it grows to next year is greater than the one rupee today. Uncertainty stems from the nature of forecasts of the timing and the amount of cash flows. We do not know for certain when, whether, or how much cash flows will be in the future.

Are Fixed Deposits still the Best Investment Option?

To avoid the consumption of everything that is produced, people use their excess savings to grow through investments. A common investment product is that offered by a life insurance company, and many people pool their money in such schemes to safeguard their future. It has been seen that most individual savers neither have the time nor the training to judge the merits of investing in the right places. It is convenient for such people to invest their money with the assurance that high stability and safety of principal amount will be there when they vest in fixed deposits. Here, there is guarantee that at a certain rate of interest, for a fixed time duration, a certain amount would mature from a FD investment. Despite the rising popularity of mutual funds, people content with moderate, but assured returns favour them over mutual funds. FDs provide guaranteed returns because they are not affected by the market’s performance.

Now, what people often forget is that FD interest income is taxable as per the tax slab of the depositor. In the trend that has been observed in 2019, it is clearly seen that banks have been gradually reducing the interest rates they offer on their deposits, especially fixed deposits. Also, with the Reserve Bank of India taking additional measures to check the liquidity concern of banks, these rates are expected to fall further. In case of FDs interest rate options are offered for monthly, quarterly, half-yearly or cumulative basis depending on one’s need; and the FD can be opened for 1, 2, 5 or 10 years. Investment in fixed deposits is suited for capital preservation, but looking for growth through them for a long-term goal is financially damaging when compared with the returns offered by mutual funds.

What Risks and Disadvantages come with Fixed Deposits and Mutual Funds?

Those who want to invest for two to three years can go into FDs but bond funds or debt funds have no credit risk would be better options to consider if one is willing to invest for longer terms. Such investors as those planning their retirement look for some source of regular income and invest a portion of their savings in FDs. As shiny as they may look, offering great returns, mutual funds have their own disadvantages such as high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution. You should never put all your money in a single specific fund. You may say that oil and energy mutual funds are safer investments but when oil prices would fall in the international market, your savings will suffer indiscriminately. Good returns from such mutual funds are complemented by the need to diversify one’s assets by investing in different types of funds to safeguard oneself from a precipitous drop in stocks.

Fixed Deposits is no longer considered as the most popular long-term investment goal; debt funds are the closest option to the conventional FDs in terms of risk; they outperform FDs by a large margin during low interest rates in the economy.  It is relatively easier to buy and exit a mutual fund scheme than prematurely withdrawing from a FD. Also, when people face sudden emergencies or have to withdraw their FDs prematurely, they face premature withdrawal penalty, usually about 1%, on closing the account. If you don’t have much knowledge about investing the right way, you may need a fund manager to take care of your investment in mutual funds, unlike the FDs which don’t have anything difficult to manage. Lastly, there are several types of mutual funds, and good investment options in FDs, it is up to you, your needs and your risk bearing capacity which one of these suits you better and helps your assets grow.