While comparing Mutual Funds with Fixed Deposits and Endowment Plans, one must always keep a few sub points in mind. These will help one determine which investment instrument is right for them as all three have their own unique pros and cons, and if used smartly and effectively can help take you a step closer to your financial goals Ambrela.Money is here to help you keep certain characteristics about each so that you can deploy your money suitably for your goals.
The core value or meaning of each instrument channel. Mutual Funds are an investment Instrument where an Asset Management Company pools Investment from both Individual & Institutional investors with an objective to reinvest by the AMC into Capital markets through purchase of stocks. A fixed deposit is offered by Banks and Non-Banking Financial Companies to invest your fund for a fixed term for a predetermined interest rate. Endowment plans on the other hand is a life insurance policy that provides life coverage and a savings opportunity.
The most determining factor for investment would be its duration thus let's discuss it in context of our instruments. Mutual Funds are usually good for a short to a long term and is more liquid in comparison to FDs and Endowment plans. Fixed Deposits are usually Midterm to long term for the best interest rates. It can range from 7 days to 10 years. Endowment plans are typically a Longterm investment spanning to 20-30 years. This could help you with planning to allocate amounts of your investment portfolio for a better planned financial future.
The next step goes hand in hand with duration that is redemption of the investment. Mutual funds can be redeemed anytime with or without exit loads except if the scheme is a Tax Saving Investment with a lock in period (generally 3 years). Fixed Deposits can be redeemed before or after the fixed tenure along with accumulated interest. However, you have a penalty if redeemed before the fixed tenure. In Endowment plans normally if the person outlives the term period, he is paid back the maturity or else a death benefit can be claimed by the nominee in instance of demise.
Mutual funds can generate high returns but are also volatile as they are linked with the market performance. Fixed deposits are a guaranteed return but have a pre-determined rate of return and Endowment plans as well assure a guaranteed return of an assured sum. However, it is only disbursed in an unforeseen situation or after the fixed policy tenure.
Investing in mutual funds can be done as an SIP or Onetime as a lumpsum. Fixed deposits can only be a lumpsum made for a fixed tenure. Investment for Endowment plans can be made monthly, annually or even a onetime payment.
Now talking about the risk, Mutual funds are generally medium to high-risk instruments. Fixed deposits have No/Low Risk as well as Endowment plans are No or Low Risk instruments with assured returns available.
When it comes to taxation in Mutual funds it depends on the type of mutual fund and its holding period. Investing in a Tax Saving Mutual Fund like ELSS will have individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961. Fixed deposits are taxed as per your income tax slab rate. Generally, the bank will deduct TDDS on interest pay-outs at 10%. However, if your total income is below the exemption limit, you can submit Form 15G (or Form 15H if you are a senior citizen), requesting the bank to not deduct TDS. Section 80C of the Income Tax Act, 1961 allows you to deduct the premiums you pay from your total taxable income, subject to a limit of Rs. 1.5 lakhs. Additionally, under section 10(10D), any benefits received from the insurance policy such as death or maturity benefits are exempt from tax for the recipients.
While researching to invest in these instruments we recommend you look for SEBI, RBI, and IRDAI regulated services only as they will be a safer regulated instrument. You can always reach out to Ambrela.Money to help you plan and manage your investments and financial concerns!! Our team specializes in instruments such as Mutual Funds, Fixed Deposits, Insurance and Loans. We hope the above given blog helps you differentiate the and choose the right investment instrument for your financial goals.
Comparision Between Mutual funds, Fixed Deposits, Endowment Plans
| Mutual Fund | Fixed Deposit | Endowment Plans |
Meaning | Mutual Fund is an Investment Instrument where the Asset Management Company pools Investment from both Individual & Institutional Investors with an objective to re invest by the AMC into Capital market through Purchase of Securities. | A fixed deposit is an investment avenue that is offered by banks and Non-Banking Financial Companies (NBFCs) to invest your fund for fixed term over which the Bank or NBFC pays out interest at a Predetermined Rate. | An endowment plan is a life insurance policy that provides both life coverage and a savings opportunity. |
Duration of Investment | Mutual Funds are usually good for Short-term to Long term & its more liquid in comparison to Fixed Deposit & Endowment Policies. | Fixed Deposit are usually Midterm to Long term investment for getting the best return. It ranges from 7 days to 10years. | Endowment Plans are typically long-term Investments spanning to 20 - 30 years. This will also inculcate a habit of long-term savings |
Redemption | Mutual Fund Can be redeemed anytime with or without exit loads unless Tax Saving Investment with a lock-in period of 3 years. | Fixed Deposit can be redeemed before or after the fixed tenure along with the accumulated Interest. However Bank will levy Penal charges if Fixed Deposit is redeemed before the fixed tenure. | If the insured person outlives the policy term then the savings portion of the plan is disbursed as a maturity Benefit & In Contrast if the Insured person expires during the policy period, the the Guaranteed Death Benefit is paid out to the Nominee. |
Returns | Mutual Fund returns are market linked & usually provides a higher return. However, it's also volatile due to market risk. | Fixed Deposits are Guaranteed Return after the Maturity having its Pre determined Rate of Return. | Endowment Plans are also Guaranteed the Return of the Sum Insured. However, it's only disbursed in an unforeseen situation or after the fixed policy tenure. |
Investment | Investment can be made Monthly (SIP) or Onetime (Lumpsum) | Only Lumpsum Investment can me made for a fixed tenure. | Investment can be made in monthly or Annually or Even Onetime Payment. |
Risk | Medium to High Risky Instrument | No/ Low RIsky Investment Instrument | No or Low Risky Instrument. Assured Returns Available in Endowment Policy. |
Taxation | It Depends on the type of Mutual Fund & Holding period. Investment in Tax Saving Mutual Fund like ELSS will have individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961. | Fixed Deposit investment is taxed as per your income tax slab rate. Generally, the bank will deduct TDS on interest payouts at 10%. However, if your total income is below the exemption limit, you can submit Form 15G (or Form 15H if you are a senior citizen), requesting the bank not to deduct TDS. | Section 80C of the Income Tax Act, 1961 allows you to deduct the premiums you pay from your total taxable income, subject to a limit of Rs. 1.5 lakhs. Additionally, under section 10(10D), any benefits received from the insurance policy such as death or maturity benefits are exempt from tax for the recipients. |
Regulator | SEBI | RBI | IRDA |