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There existed a time when investors allotted surplus cash towards one of the most traditional investment options – fixed deposits, or commonly known as FD. Our grandparents and possibly even our parents have contributed at least once towards their FD account. After all, it was believed to be one of the best investment options that helped to attain interest while safeguarding the capital. So, what changed? What made retail investors to ditch their fixed deposits and shift to mutual funds? This article aims to answer this question. Read on to know more.

Drastic shift from FDs to mutual fund investments

During the demonetization in 2016, mutual funds cashed in onto the instance of the reduced return rates on fixed deposits. Also, owing to the availability of tax saving mutual funds – ELSS (equity linked savings schemes), mutual funds established their eminence. As opposed to FDs, mutual funds started offering substantial returns along with the added advantage of liquidity. This led to several investors with high risk appetite to take a jump into the world of mutual fund investments. As a result, FDs lost their charm as the most prevalent long-term investment option.

Mutual funds vs Fixed deposits

The following table aims to draw out the differences between fixed deposits and mutual fund investments:

Parameter Fixed deposits Mutual funds
Definition Fixed deposits or FDs are a type of investment that allows investors to invest their surplus cash and earn returns at a fixed rate (predetermined by the government) for a fixed period of time. Mutual funds are financial vehicles wherein an AMC (asset management company) pools the money of several investors to invest in different securities such as money market instruments, bonds, stocks, cash and cash equivalents, etc.
Professional management FDs do not offer any professional management on their investments Mutual fund investments are professionally managed by mutual fund experts who are endowed with skills and requisite knowledge to invest in the markets. These experts are commonly referred to as fund managers.
Risk profile FDs are relatively safer investment options than mutual funds as returns on these investments are pre-determined by the government. Mutual funds carry low to high risk depending on the type of mutual funds you invest in. Note that investments in mutual funds are subject to market risk.
Returns Fixed deposits provide fixed and guaranteed returns over a specific time period. Returns on mutual fund investments are connected to the markets they invest in and are totally dependent on the performance of the underlying markets.
Investment mode Investors can invest in fixed deposits only through lumpsum mode of investments Investors can invest in mutual funds either via a systematic and regular mode of investment – systematic investment plans (SIP) or lumpsum mode of investment.
Expenses FDs do not charge any expense to the investor both over the course of opening an FD and during the investment duration. Mutual funds levy certain expenses and charges that are removed from the total returns as a fee for managing the fund.
Taxation Fixed deposits are taxed at 10% per annum on gains earned above Rs 10,000. LTCG (long-term capital gains) and STCG (short-term capital gains) are taxed at 10% and 15% per annum respectively for equity funds*. For debt funds, LTCG are taxed at 20% per annum with the benefit of indexation**. On the other hand, STCG are taxed basis the income tax slab an investor belongs to.

*LTCG on equity funds up to Rs 1 lac are exempt from paying any tax.

**Indexation is a method by which the cost of acquisition of an asset are inflated over a period to reduce the taxes.

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