Fixed deposits are a pure debt-oriented investment product, while mutual funds offer the opportunity to invest in different types of asset classes.
Traditionally, Indians have been investing in fixed deposits (FDs) because of the safety they provide. However, in recent times, mutual fund investment has witnessed a significant surge in the AUMs of fund houses. For investors, mutual funds (MFs) may be better as a qualified fund manager manages them. Mutual funds offer the opportunity to invest in different types of asset classes such as debt, equity, gold, and so on. Depending on the age, risk appetite, and return expectation, an investor can select an appropriate mutual fund scheme. On the other hand, fixed deposits are a pure debt-oriented investment product and are suitable for people with low tolerance to risk. However, if you are planning to make an investment, which one should you choose — mutual fund or FD? Let us find out the answer.
Mutual fund sahi hai
You must have seen the advertisement in the media. Mutual funds are nothing but a pool of funds collected from investors. The corpus is invested in a set of assets to provide better returns to investors. A fund manager is assigned to take care of the fund.
Should you invest in mutual funds in the current market?
NIFTY is trading at an all-time high. This is despite the bad news on various economic fronts. However, we should understand that the market is always forward-looking, while the economic data is always based on the past. Moreover, many investors confuse NIFTY with the market. NIFTY is just a set of 50 large stocks. The mid-cap and small-cap indices have shown a drastic fall. Now to answer the question, it is indeed the right time to invest in the mutual funds, provided you do it in a systematic way, i.e., by systematic investment plan or SIP.
Options in mutual funds versus FDs
In the case of FDs, there are not many options except marginal change in the rate of interest from various banks. The returns are similar, and the risk is very low or nil. The interest rate on FD for 1 to 5-year tenure is close to 6% to 6.8% pa by most of the banks.
Mutual funds offer plenty of choices. They are primarily of three types based on the proportion of equity.
# Equity mutual funds: They invest a larger part of the fund in equities. Equities give higher returns over the long run, but they are risky because of market fluctuations. An aggressive investor may look for equity mutual funds. You can expect a return of 10% to 18% in the long term.
# Balanced mutual funds: They have a significant portion of the fund invested in debt or bonds. The presence of bonds in the portfolio reduces risk but also moderates the expected return. You can expect a return of 8% to 15% in the long term.
# Debt funds: They invest mostly in debt and a small portion in equity instruments. Since the debt part is large, the risk is the lowest, but so is the return. This is ideal for conservative investors. You can expect a return of 6% to 9% in the long term.
Important points to keep in mind
You must know the risk and reward of various mutual fund types, as mentioned above, and then invest in sync with your risk appetite and return requirement. Equity funds may be attractive because of their high return potential, but they also expose you to high risk, especially if your investment horizon is short.
As a professional fund manager manages mutual funds, the fund houses charge you a fee for their services. The fee is known as expense ratio. This could be anywhere between 1.25% and 3%, depending upon the fund types.
Finally, Systematic Investment Plans (SIPs) are the way to invest in mutual funds. The advantage of SIP is two-fold. One, it instills a good habit of saving a portion of your income; Two, it balances the ups and downs of market fluctuations. Regular investment in mutual funds through SIPs can make create huge wealth for you in the long run.
(By Ravi Jain, Chairperson, JRK Group)
Disclaimer: The author is not a SEBI-registered advisor or a financial adviser. The article is for educational purposes only and do not constitute specific financial, trading or investment advice.