Investment | November 30, 2019
Fixed
deposits are a pure debt-oriented investment product, while mutual funds offer
the opportunity to invest in different types of asset classes.
Mutual funds offer plenty of
choices. They are primarily of three types based on the proportion of equity.
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)
Note: Article originally appeared in financialexpress.com. Link to the source article is as mentioned below:
https://www.financialexpress.com/money/mutual-funds/mutual-fund-vs-fd-which-of-the-two-offers-better-investment-opportunity-for-you/1773487/