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.

Reasons 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 years.
  • 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 option. Still 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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