For years, when it came to saving, the only option you could hear from your family and friends was to open a fixed deposit account. Well, to be honest, back then there was a trend toward investing in fixed deposits.

In the past, FDs doubled in 6 years, giving an average return of 12% over the course of that time period. At the moment, bank FD rates range from 4.5% to 5.5%.

In the diverse landscape of investment options in India, these two stalwarts have long been vying for the attention of investors - Mutual Funds and Fixed Deposits. Each offers a unique set of advantages and disadvantages, catering to different financial goals and risk appetites.

In this article, we will get to know whether mutual funds are competing with bank FDs or not.

Basics of Mutual Funds and Bank FDs

Mutual Funds: A Dynamic Approach to Wealth Building

Mutual funds have gained immense popularity in recent years, primarily due to their dynamic and diversified nature. With a plethora of options, including equity, debt, and hybrid funds, you can tailor your portfolios to align with your financial objectives and risk tolerance.

Before getting ahead, let’s understand debt, hybrids, and equity!

Past Performance of Equity & Debt:

Since the performance of equity and debt has been amazing, the question is whether you should take a shift from bank FDs to mutual funds.

This shift is primarily dependent on two factors:

1. Your risk profile

If you are someone who likes to take risks and wants higher returns to reach your financial goals early, then a transition to equity is your option. However, if you want stable returns with low risk, then a transition to debt would be a viable option.

Now the question you might ask is since FDs too come with stable returns and low risk, why opt for debt mutual funds?

Let's examine the distinctions between debt funds and fixed deposits. You can choose the investment that is right for you with the help of the table below.

Life stage

Another factor is at what life stage you are willing to make this transition. If you are in your early 30s, you might be willing to take some risk to earn higher returns. Thus, you can pursue your bank FDs into equity mutual funds.

Investing in equity in your 50s or even 60s might not be a viable option as risk would be higher, debt mutual funds can be a better option here. Considering your life stage is very crucial when making informed investment decisions.

Since investments made in mutual funds carries certain risk and Bank FDs don’t, how can one mitigate these risks?

The answer is with Asset Allocation!

In the investment world, there is a saying, “Don’t put all your eggs in one basket”. This states that by investing in a variety of assets, your investment aims to reduce the risk associated with having all your money in one type of fund. In the dynamic world of finance, constructing a well-diversified investment portfolio is a key strategy for managing risk and maximizing returns. One approach gaining popularity among investors is the inclusion of multi-asset funds.

Mentioned below is a table that represents how different asset classes have alternated in leading the return category since 2005. There were times when domestic equities did better, while due to robust economic growth, there were times when gold performed better during times of inflation or economic uncertainty.

Conclusion:

In the tug-of-war between mutual funds and fixed deposits in India, there is no one-size-fits-all solution. Both investment vehicles have their merits, and the choice ultimately depends on the investor's individual preferences and financial goals.

As the investment landscape continues to evolve, a judicious combination of mutual funds and fixed deposits may prove to be the winning strategy for investors aiming to strike the right balance between risk and reward.

Disclaimer: The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose