Comparative Study of Mutual Funds and Bank Deposits

3146 Words Apr 30th, 2013 13 Pages
Mutual Funds vs Fixed Deposits: Compare which is better!
Comparison between mutual funds and fixed deposits is a long debate, especially when it comes to a comparison between fixed deposits and debt mutual funds. Even a few years ago, any conservative and risk averse investor would think investing in bank fixed deposits is better than mutual funds (debt or otherwise). Nevertheless, the market scenario has changed a lot in the recent years, and many a mutual funds family has come up with interest debt mutual fund schemes with guaranteed returns alongside capital appreciations.
This makes the comparison between debt mutual funds versus fixed deposits more complex, and even the most risk averse investor (count my father!) is led to think
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3. Mutual funds and fixed deposits: Capital appreciation
When it come to capital appreciation, mutual funds are better than fixed deposits, because of the equity investment. In longer time periods, market changes result in increasing interest rates. And, your mutual funds manager is there with all the expertise and professionalism to ensure a better capital appreciation.

Mutual Funds Manager's Recommendation: Debt funds. No second thought.
4. Mutual funds or fixed deposits, which one is more liquid?
In terms of liquidity, these days both fixed deposits and mutual funds are almost same. Fixed deposits are actually meant for long lock in periods, but most banks allow premature withdrawals with a nominal penalty (usually 1%). The interest rate calculation for bank fixed deposit withdrawals is done on how long the money was parked. Mutual funds are equally liquid; you can take out any number of units within a couple of days. The return for premature withdrawal of mutual funds units is done on the prevalent NAV of the fund. Usually, there is an exit load of 1% for premature withdrawals before 1 year.

Mutual Funds Manager's Recommendation: Almost equal. For premature withdrawals beyond 1 year, mutual funds are slightly better because of nil exit load.
5. Risk factor of mutual funds and fixed deposits
The only reason why most investors prefer fixed deposits to debt mutual funds is the assured return of the capital. On the other