What is safer and gives better returns?

Mutual funds, with higher risk, have the potential to keep pace with inflation, experts say

For years, investors have trusted term deposits (FD). It remained for them the most reliable investment instrument. The reasons are simple: it’s convenient to manage, risk-free, and most importantly, many don’t want to experiment yet. However, with the emergence of debt mutual funds as an alternative, many investors are making the transition to this one. But which is better than the other is a question that cannot be answered without delving into some of the main factors that influence an investor’s decision to go one over the other. And you would think that the returns are the only determining factor, it is not.

Here is an overview of 5 factors to help you get the most from your investment:

1) Risk

One of the main reasons many investors choose FDs over other investments is that they are almost at risk. You get your principal as well as interest at maturity. The bank can default on your FDs only with high NPAs. But even then, you may get your principal and interest back. When it comes to debt mutual funds, they are subject to market risk and there is no assurance of safety of capital and this becomes the underlying difference between the two. Anyone who invests should take the risk factor into consideration and invest accordingly.

2) Returns

It’s always in your head, isn’t it? It has to be, because we invest to make sure we get bigger and better returns. FDs offer you a fixed interest rate over the entire term of the investment. Mutual funds do not give you guaranteed returns because they are directly linked to the market. The data shows that debt mutual funds, for a similar length of time, have outperformed DFs in terms of return, but never forget that the market dictates everything in this investment instrument.

3) Taxation

Gains on term deposits, regardless of their duration, are taxable according to your tiles. However, the elderly can benefit from interest deductions of up to Rs 50,000 during a fiscal year. On the other hand, short-term gains, i.e. less than 3 years, on debt mutual funds are taxable according to your tax regime, but long-term gains are 20% with l benefit of indexing.

4) Liquidity

First, both are very liquid, but since mutual funds can be redeemed at any time, they can be considered more liquid. But there is a charge for their reimbursement within the exit charge period. Once this period has elapsed, the units can be redeemed free of charge. For FD, some banks may charge for premature withdrawal.

5) Inflation

If there’s one thing that can really turn out to be a spoiler for your savings, it’s inflation. But riskier mutual funds also have the potential to keep pace with inflation, experts say. For example, if an investment in FD earns you 6 percent interest, but the inflation rate is 5 percent, the final yield drops to 1 percent. Debt mutual funds, on the other hand, can offer better returns.

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