A lot of people prefer investing their money in fixed deposits for FD because it is one of the safest and well-known ways to invest your money. A fixed-rate of return also seems lucrative for people who don’t want to risk their hard-earned money.
However, with the current changing scenario, is it still a wise choice to invest your money in FDs? Is the fixed deposit interest rate the best? Or is it time to look for alternatives such as Balanced Funds?
Difference between FDs and Balanced Funds
A lot of amateur investors don’t know the difference between Fixed Deposits and Balanced Funds. They pose many questions when it comes to investment. So, here are the major differences between the two.
Return on Investment (ROI):
An FD has a fixed interest rate throughout the tenure; it means you will get a predetermined sum as interest throughout the investment. On the other hand, balanced funds over variable interest and you are more likely to benefit more if you invest in balanced funds for an extended duration.
Rate of Return:
As mentioned earlier, fixed deposit interest rates are predetermined. However, the interest in the balanced funds depends on the market trend. If the market is performing well, you will get higher returns, and if the market is down, your interest will dwindle as well.
FDs have no liquidity. The amount you invest in them is locked away for a predetermined duration. If you withdraw from an Fixed Deposit before the term is over, you need to pay the penalty. On the other hand, the liquidity of balanced funds is higher than that of FDs. The balanced funds can be sold quickly without losing significant value.
Fixed deposits are the safest form of investment. On the other hand, balanced funds are subject to market risks. The risk is higher in case of equity balanced funds where the money is majorly invested in stock markets.
Effects of Inflation:
Money invested in FDs has nothing to do with the rate of inflation. You will get a fixed return throughout the investment duration as the FDs offer a fixed deposit interest rate. However, the returns in balanced funds are adjusted depending on the rate of inflation. So, you will always get proper returns depending on the market conditions.
The funds deposited in an FD are taxable depending on the tax slab under which the investor falls, whereas the funds put in a balanced fund are taxed depending on the duration of the investment. The short-term and long-term capital gains are taxed differently.
An investor needs to evaluate the risks he or she is willing to take before deciding to invest in an FD or a balanced fund. FDs require you to deposit a big sum, whereas you can invest a small sum in a balanced fund. If you want a steady return throughout the investment with no risks, choose FDs. If you want a better return in long-term, balanced funds would be a better option.