Mutual Funds vs Fixed Deposits - Which is a better option?

Mutual Funds vs Fixed Deposits, Which is better among these? And is a third better option possible? One question which many people asked was that why Fixed Deposits (FDs) are not a good investment, and I will tell you why according to me it's true, and Mutual Funds are risky. So which will be a good option among these two? And there is an investment option that is between two, it is comprising of all good things of these two.

First, In this post, I will share what are the pros and cons of Fixed Deposits (FDs), what are its benefits and negatives. 

Second, What are the benefits and negatives of mutual funds?

Finally, the third topic, a new investment strategy that is made using the best of both of them, how to understand it and if you want to make that investment then how can you do it?

What are Fixed Deposits?

First, Fixed Deposits are the most assured & secured investment, if it says that I will give you 4-5% every year on your money then that will definitely come, mostly because FD is a government-supported form of secure investment you can make but for this positive, you have to be ready for negative too. Since the risk is almost zero, so the negative is that its return is also less.

Financial Strategy has a very important rule that risk and return move in the same direction only. If you are ready to take high risk then you get a high return too. If you want to take a low risk then your return will also be low. 

So, the worst part about FD which really bugs is that if you can look at the inflation rate that how the prices are going up and how that is decreasing the value of your money. 

So the return you get on FD which is 4-5%, maybe wasting your money, because if inflation is 5% and FD is giving you only 4%, then it means that by the end of the year your 100 rupees will become 104 rupees but a thing which was sold at 100 rupees earlier is now for 105 rupees because the inflation is 5% so your capacity to buy things has reduced, your money is actually destroyed and that is the worst thing about a Fixed Deposit.

So that's why people say that you should take FD only when you want to secure your money and it's a good investment, but not in our opinion, if you are young. If you are in your 40s or 50s and you want to secure your wealth, you don't want to take a risk, you don't want to invest in the stock market, then Fixed Deposit is a great investment to make, it's a safe investment to make because you know your money will keep growing gradually.

Yes, inflation will surely affect it but not so much. Over a long-term period, it is very detrimental, not so much for a short-term period.

What are Mutual Funds?

Mutual Funds are generally of big companies, like HDFC Mutual Funds or ICICI Mutual Funds, or some other bank, and they have portfolio managers. People who manage your money and according to your risk profile, they invest in stocks on your behalf. 

So, you would invest in mutual funds, and mutual funds would invest in stocks to generate money. The positive in this is that you get a much higher rate of return. 

If FD would give you 4-5% then a good mutual fund may give you 12-15% or even higher over a long-term period which means that your money is growing almost 3x faster. 

But what are the negatives? 

• Mutual funds are subject to market risk: It means that the day you would want your money, your return will depend on the condition of the market that day.
• Taxes on returns: Whatever return or gain you get, if your mutual fund of 100 rupees is now at 140 rupees, so you will have to pay a tax on that gain of 40 rupees and it depends on the duration of the time you had that mutual fund for. It is important you note that you will have to bear a tax on that gain of 40 rupees, either long-term capital gain tax or short-term capital gain tax 
• Applied fees to invest in mutual funds: You have to pay a fee, usually, it's entry fees or exit fees.

So the good thing in comparison to Fixed Deposit is that you can withdraw your money whenever you want whereas in Fixed Deposit you invest your money for a fixed tenure. You can withdraw your money whenever you want in mutual funds, the money is in your bank within 1-2 days, but there is usually a fee attached to withdrawing be deposited in your bank.

Now this tells you that Fixed Deposit is safe and secure but the rate of return is not so good, mutual funds have a good rate of return, and money can be withdrawn anytime but it is a risky asset.

So there is a middle ground? In our research, we have found a middle ground and want to share it with you it is called Capital Guarantee Investment Plan.

Capital Guarantee Investment Plan

Many banks provide these investments, they are based on three things 

1. Investing by monthly premium: A monthly investment amount where you can small amount over a long period of time can become really big. So, it doesn't matter how much you can afford to invest. It would be Rs. 2,500 or Rs. 5,000. In Capital Guarantee Investment Solutions, you will have to invest a minimum of Rs. 2,000 - Rs. 2,500 per month. You will have to start with that, unfortunately, there are very few or no plans for the month. When you invest this money, the first thing is that whatever is your monthly premium, for example, you invest Rs. 10,000 per month then you get life insurance worth 120x times your monthly premium, which means in the duration of your investment. God forbid if something happens to you and you die then your family or whoever you nominated gets this 120x times amount, So for Rs. 10,000 you or your family gets a life insurance cover of Rs, 12 Lakh.
2. Guaranteed Capital: In this, your capital is guaranteed. For example, you are investing Rs. 10,000 every month, then in a year you will invest Rs. 1,20,000, which means if you invest for 10 years then you will Rs. 12 Lakh. Now, at the time of maturity, when you are supposed to get the amount, then you will get a minimum of the amount you invested. Your investment will never go lower than your original amount. And basis on how the company performs in the last 7 years, you can earn much more than that as per market risk. And the last 7 years' trajectory shows us the likely amount you will get.
3. Tax-free returns: Whatever amount you will finally get, will be tax-free. There will be no long-term capital gain tax. And that makes the entire investment tax-free.