In this article, we will discuss the differences between mutual funds and fixed deposits (FD) and compare them so that you can choose the right investment option that works for you.
What is Fixed Deposit (FD)?
Fixed deposits are financial products where you deposit a certain amount in the bank, which can be withdrawn after a certain period of time. The interest rate offered on fixed deposits is higher than that of savings accounts and recurring deposits.
You can invest in FDs for a period ranging from 30 days to 360 days and invest a minimum amount of N100,000. You can also open an FD through banks, or any financial institutions such as mutual funds or stock brokers.
What is mutual funds?
Mutual funds (MF) are a type of investment that has the goal of generating returns for the investor, who pays fees to the fund manager for managing the portfolio. Mutual funds comprise a collection of different stocks and bonds, and each share in a mutual fund represents an ownership stake in all those underlying assets.
The fund managers run the portfolio by deciding which securities they will buy or sell based on their perception of market conditions at any given time. They can also change their strategies over time to take advantage of changing market conditions or trends.
Mutual Funds vs. Fixed Deposit (FD)
Mutual funds are funds that are managed by a professional fund manager. A mutual fund is a collection of money from many investors, who pool their money to invest in stocks, bonds, or other assets. Fixed deposits (FDs), on the other hand, are funds deposited in a bank for a fixed period of time. An investor can earn greater returns on his money by investing in mutual funds as compared to FDs because they offer higher interest rates than FDs do.
Equity mutual funds have higher risk and are better suited for investors with a high risk appetite as compared to debt mutual funds which have a lower risk but may not generate as much ROI. As an investor’s risk profile changes over time, it is advisable that they switch between equity and debt-based investment strategies to get the best returns without jeopardizing their capital base too much.
Which option suits your needs?
It is important to understand this difference between mutual funds and fixed deposits (FD) before deciding which one suits your needs.
- FDs have a fixed tenure and you cannot withdraw your money before the maturity date. This means that if you invest in an FD for 1 year, then need the cash after 6 months, you will not be able to withdraw it prematurely (without penalties).
- Mutual funds have a flexible tenure and you can withdraw your money anytime without penalty or tax implication.
Who should invest in mutual funds?
If you are a person investing for the long term, and are willing to take risks, then mutual funds are the best option. If you want to diversify your portfolio and get better returns, then mutual funds are the best option. Mutual funds allow investors to invest in stocks and bonds and have exposure across equity and debt markets through one investment instrument.
If you want to invest in a particular sector or theme such as healthcare or education then mutual funds also offer more flexibility. With fixed deposits, investors can choose only one sector out of many available sectors being offered by different banks/financial institutions.
When to invest in FD?
When you invest in a fixed deposit, the money is locked for the specified period of time. So you don’t want to invest the money that you will be needing soon. If you do and have any urgent need to withdraw money before the maturity date, then it will attract some penalty or interest rate deduction.
However, in the case of mutual funds, there are no restrictions on when you can buy and sell units.
SIP and FD
SIP (Systematic Investment Plan) is a better option than FD because it gives you the benefit of compounding. This basically means that the returns on your investment are reinvested and earn interest again. The interest earned by your investments then becomes the base on which future earnings are calculated, thus earning even more money.
In contrast to this, when you make an FD deposit, your money gets deposited into an account and stays there until you withdraw at a later date. So if someone were to tell you that they had invested N100,000 into an FD for 10 years at a rate of 5% per annum, what does this mean?
It means that after 10 years, if they withdrew their N100,000 from their account, they would get back N150,000 – i.e., (5% x 10) more than what they had put in originally! This is why SIPs are better because, in compounding, you earn interest on the principal and on the interest amount earned as well.
If you want better returns, mutual funds is your best bet.
Mutual funds have better returns than fixed deposits. However, if you want a stable income and are not interested in taking risks, then FDs can be your best option. They offer less returns but a bit more security than other options such as shares and bonds etc. It can also be a good idea to keep some money in fixed deposits and some in mutual funds. This way, you can get the best of both worlds.
Ready to get started on your investment journey? Begin investing in mutual funds.