As a smart investor, one should choose an investment option not only to save tax but also to generate a tax-free income. While formulating plans to segregate their funds for investment, investors should always consider those plans which synchronize with their goals and risk appetite while acknowledging factors such as safety, returns, and liquidity before an investment.
With FD and mutual funds standing out as popular tax saving investment tools choosing the right plan could be a stumper for a newbie. Devised below is a comprehensive compilation intended to guide every new investor in making an informed decision.
What are Mutual Funds?
Mutual funds are a tax saving investment where several investors come together with a common goal. The investors then pool in their money in the form of equities, bonds, securities, or any other money marketing tools. The income earned from mutual funds is then shared equally among the investors after deducting the expenses incurred.
What are Fixed Deposits?
A deposit made with a bank or any financial platform over an agreed period is called a fixed deposit. Investors can choose the tenure ranging from 7 days to 10 years. The income earned over the period gets deposited into the FD account. The FD interest rates offered varies from bank to bank.
Mutual Funds vs. Fixed deposits
|Criteria||Mutual Fund||Fixed Deposit|
funds are entirely susceptible to market risks. The income earned
from this investment depends on the performance of the stock
it offers higher returns if the market climate remains favorable.
deposits offer guaranteed income, regardless of the deposit
amount. It is also independent of the market climate. The income
earned from FD depends on the tenure and FD rates offered.
|Risk||Since it depends on the market, mutual funds fall under high-risk investments.||Since it is independent of the market, FDs are a zero-risk investment.|
|Expenses incurred||Investors who hold mutual funds will have to bear the mutual fund charges in the form of shareholder transaction costs, investment advisory fees, marketing, and distribution expenses.||FDs involves only a one-time deposit during initiation. No further charges are engaged during the investment.|
mutual funds are subject to short-term and long-term capital gains
is charged at a 15% flat rate, and LTCG is charged at 10% of the
earnings above ₹1 lakh. In the case of debt funds, LTCG is 20%
per the recent reforms in the Income Tax Act, no tax will be
deducted from the source of the income earned from the FD saving
account if it is not more than Rs 50,000.
the interest earned is more than Rs50,000, a 10% tax will be
deducted at source and 20% if PAN details are not submitted.
Therefore, if an investor is looking for an assured, low-risk investment, then fixed deposits are preferable. If an investor is capable of a high-risk appetite, then Mutual Funds are a viable choice with high returns.