Mutual Funds Are Better Than Fixed Deposit
Last Updated: May -29-2018
India is said to be the risk-averse country. Indians deny taking the risk especially when it comes to Investments. As fixed deposits are said to be zero risk investment, 6800 billion has been invested into bank fixed deposits so far by Indians.
But there is a clause, investing in bank deposits is a waste of money. Yeah! You heard right. If you investing bank FD's, you're keeping your money in a sealed lock with a full guarantee of money but with no value.
Here are the few reasons why you shouldn't go for FD's
Inflation is a masked enemy: Inflation is a sustained increase in prices of goods and services in the society. Due to inflation, the prices of everything will increase over time. The value of an unit money is calculated by the purchasing power.
The purchasing power of the money will be decreasing year after year or in another note the prices of everything we buy will increase over time.
So Inflation is one of the enemies for investment and interest rates.
For example, In 90's haircut might cost you around Rs.8 on average and today it's about 10 times of it. Likewise, everything will cost you as the inflation routes it.
Even though the government will take substantial measures to control inflation the average growth is about 5%. So if you bid to buy something with 100000 INR today. The same product or service will be 105000 INR after 12 months.
So the purchasing power of money goes down with time.
Post taxes will eat off your profit: Fixed deposits have no tax exemptions after Rs.10000 of Interest income.
Banks show an interest rate of 8.5% on average and after TDS you might pocket 8%.
As we discussed earlier, the average inflation rate is 5%, the interest rate you got by putting your money in the fixed deposit is 8%
After the inflation cut,you get only 3% (8-5= 3%) on your investment.
|Mutual Funds||Fixed Deposits|
|Rate of Returns||No Assured Returns||Fixed Returns|
|Inflation Adjusted Returns||Potential for High Inflation adjusted Returns||Usually Low Inflation adjusted Returns|
|Risk||Low to High Risk (Fund Dependent)||Low Risk|
|Premature Withdrawal||Allowed with Exit Load/No Load||Allowed with Penality|
|Cost if Investment||Management Cost/Expense Ratio||No Cost|
So, why do people go for FD?
Most people have only heard about Fixed deposits as the investments products from their parents. People invest in fixed deposit because it bears zero risks from their perspective. But in reality, you're keeping your money in a sealed lock with a full guarantee of money but with no value.
Most of the banks charge an extra for premature withdrawal.(please take a note of it)
What is better to do instead?
Though fixed deposits are assumed to be an asset and are popular in the Indian community. Debt instruments and liquid funds or not well placed in the Indian hearts. These 'new to know' Investments are also risk-free(to some extent) and can add from 1.5- 2.5% when compared with fixed deposits. If you are aware and can take small risks you can go for other mutual fund sections like equity funds. You can also take up balanced mutual funds with moderate growth and moderate risk.
"Always, risk is directly proportional to growth".