Tax Savings: Mutual Funds over FD

There are a variety of investment options
available in the market these days to invest in. What guides their investment choices
mostly depends on three factors, namely, the rate of returns, the scope of tax
savings and risk factor.One may argue that both mutual funds and tax-saving FD
schemes are equally virtuous and suitable for investors but one must understand
each of these investment options have their own share of pros and cons that
make one more suitable than other under various situations.

to choose mutual funds over FD for tax saving

The following differences point out why
investors should choose mutual funds rather than FD for tax saving:

  • Returns: The returns earned through mutual funds aren’t
    fixed, as per its performance record in the last 5 years mutual funds have
    earned over 14-16% returns and are also exposed to the risk of the equity
    market. While in the case of FD, the interest rate is decided by the bank and
    tends to range between 6-7.5%.
  • Term period:Most mutual funds come with a lock-in
    investment period of 3 years, which is deemed compulsory. Investors may
    reinvest or redeem their investment after the completion of the term.   But in the case of FD, the minimum lock-in
    investment period is 5 years which can be extended up to 10 years.
  • Risks: Since most equity-based mutual funds are
    exposed to the market conditions they are subjected to risks but at that the
    same time they have a good track record of offering better returns that
    compensate the associated risks. The FD isn’t exposed to the market as such and
    hence assures capital protection.
  • Tax-Efficiency: A 10% long-term capital gain tax is
    applicable on mutual fund returns over Rs.1 lakh. But the same cannot be said
    about FD, the returns earned on FD are taxable and the rate is decided as per
    investor’s tax slab.
  • Liquidity: Most mutual funds come with a lock-in period
    of three years and offer the investors the opportunity to withdraw, exit or reinvest
    their funds on the basis of the satisfaction level of their funds’ performance.
    But it’s not the same in the case of FDs; one cannot withdraw FD before 5
  • Online facility: Most mutual funds can be started and
    continued online as a lump sum or through SIP but the same online facility may
    not be made available by the banks for the FD investors.

Before putting your money in a mutual fund or
an FD option, make sure to weigh in factors like your age, investment period,
risk appetite and financial goals. It is a smart move to opt for the mutual
fund if you wish to accumulate wealth and want to enjoy tax benefits at the
same time. But those who have a traditional outlook towards investments owing
to their risk appetite or proximity towards retirement still prefer the FD

confused which investment option is best for you? Convey your investment woes
to our financial experts and allow them to help you out with your dilemma.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 167127

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