Debt mutual funds and fixed deposits share common purpose of investment: Safety of investment and steady return. Some of the criteria are liquidity, tax treatment, ease of investment, ease of withdrawal and credit rating. Depending on individual circumstances, short term vs. long term financial need and risk appetite, you can decide the ideal choice between the two. When considering FD vs. mutual fund, by and large, both the instruments serve the purpose, there are fundamental differences when the investor chooses to invest his hard earned money. If you have a large investible surplus, you can also choose to make a combination of debt mutual funds and FD to create ideal fixed income portfolio. Here are some key points you can evaluate if you come across the choice between FD vs. mutual fund.
Interest Rate
In Fixed deposit investment, the rate of return is certain. You will have a precise idea of the amount of FD rates and maturity amount before you invest in the fixed deposit. However, the same is not true with debt mutual funds. Since any mutual debt fund holds several governments’ and corporate debt instruments, its return varies daily. At the end of each business day, debt mutual funds declareNAV (Net Asset Value) of each unit. Based on the same, you can know the rate of return. Usually, the returns of fixed deposits and debt mutual funds are comparable, with a difference of 0.5% to 1.5%, based on the type of fixed deposits and mutual funds. When the interest rate is at pick level, it is better to invest in fixed deposits of reputed NBFCs so that you can lock the higher return for your investment. With the help of online FD calculators, you can understand the difference precisely. It matters a lot particularly when the amount of investment is higher.
Ease of Investment
Apart from the FD rates, it is important to know the efforts required to invest the money. Traditional fixed deposit requires visiting the bank multiple times before your money can start generating the interest income. However, with the help of technology, many NBFCs offer internet FD to invest your money with ease. Similar is the case with mutual funds. You need to be KYC compliant customer if you want to invest in debt mutual funds. Nowadays, many fund houses provide an online investment opportunity. For a small amount, you can be e-KYC compliant with your PAN and AADHAR number. While for a large amount, you have to complete regular KYC.
Ease of Withdrawal
If you have invested in close-ended mutual funds like FMP (Fixed Maturity Plan), you cannot withdraw your money before the maturity date. The loan against mutual fund is also not available in the financial market, even if it is, it is not practical to do so. If you have invested in the open-ended mutual fund, you can withdraw your money at short notice. After your withdrawal request, money comes to your bank account within 3-4 business days.
On the other hand, for Fixed Deposit investment, you have two choices: You can break your FD, or you can take a loan against FD. The choice depends on a couple of factors: If you are in the middle of the maturity period of the FD or near to maturity period, it makes sense to take a loan against FD and quickly repay it or adjust at maturity. If you have recently made FD, it is a better choice to break the FD. However, penal interest is chargeable if you break your FD before the maturity period.
Quality of the Investment
There area plethora of choices in debt mutual funds when it comes to quality of investment. You can get higher interest in debt funds like “Credit Opportunity” funds, where it is categorically informed that credit quality of the investment in the fund is questionable. So many choices confuse mutual fund investors to chose the right fund. Here fixed deposits scores better than FD. For example, Bajaj Finance offers AAA rated fixed deposit, that is the highest possible credit quality and least possibility of default. The rating is offered by independent agencies like CRISIL and ICRA Ratings Agencies. Here you can get ‘bank-like safety’ of your fixed deposit, with ‘better than bank’ interest rates. However, apart from credit rating, investors should also vouch for past several years’ history of the NBFCs to know their repayment capability.
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