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Mutual Funds vs Recurring Deposits - Where Should You Invest?

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Created on
August 3, 2022

Summary

What’s Inside

A mutual fund is an investment plan where an investor can invest money regularly in a scheme as per their choice — which can be monthly, quarterly or weekly, known as a SIP. An ECS mandate can be set up via your mutual fund app. The deduction date varies from the platform, and an investor may be presented with various options. 

Depending on your chosen date and frequency, the amount selected will be deducted from your bank account unless you cancel your SIP. 

What are Recurring Deposits?

In a recurring deposit scheme, you must select a term and a monthly deposit amount. As soon as the plan begins, you must deposit the cash each month for the length of the plan. You may generally select a length between six months to 10 years. Recurring deposits are convenient for your wallet since you can choose the frequency, and the risk is low. 

For instance, if you start a recurring deposit by investing ₹1000 per month for 10 years, then every month, ₹1000 must be deposited in the scheme. It's very similar to JARS that the Fi Money app offers. However, with JARS, there are many advantages — you can deposit anytime you wish + any amount you want to (even ₹1), set different goals on the app and deposit accordingly.

What are Mutual Funds?

A fund collectively accumulates money from several investors and then invests the proceeds in several asset classes like bonds, equities, and money market instruments. Such a collective investment vehicle is known as a mutual fund. The fund is managed by a fund manager with relevant industry experience and invests on your behalf. In India, mutual funds are established as a trust and governed by SEBI, and mutual funds work under regulations laid out by SEBI (Mutual Funds) Regulations, 1996.

Comparing Mutual Funds Vs Recurring Deposits

Criteria 

Mutual Funds 

Recurring Deposits

Investment tenure

Investments in mutual funds in the form of SIPs allow periodic investments, including daily, monthly, quarterly or yearly or as a lump sum.

Investors must compulsorily invest their chosen amount every month.

Types of schemes

You may choose between debt and equity funds based on your risk tolerance.

You must invest in a deposit plan with a fixed rate of return. If you seek flexibility, you can pick a flexible recurring deposit scheme.

Risk involved 

Capital and return risks may exist depending on the stock market. Mutual funds may provide high returns when kept for an extended time. Also, mutual fund NAVs change in response to market fluctuations.

Recurring Deposits are one of the most risk-free forms of investment. They have no adverse risk because the principal is covered.

Returns

The debt and equity markets and the fund plan are chosen to determine the results for a mutual fund. It delivers market-linked returns based on the performance of the underlying portfolio.

Because the interest rate in a recurring deposit plan is established and known at the time of investment, the return is also fixed and known at the time of investment.

Withdrawal of your investment 

‍Because mutual fund investments do not have a predetermined maturity date, there is no penalty for redeeming MF investments before the SIP period finishes. However, in SIPs, in the case of ELSS plans, there is a lock-in period of three years from the date of investment and cannot be withdrawn before the lock-in period ends.

‍It may be revoked before the stated duration expires. However, such an early withdrawal incurs a penalty in the form of a drop in the interest rate.

Taxation 

SIP investment returns are taxed similarly to capital gains. However, the tax is not due until the investments are redeemed. Tax rates on such profits differ depending on the holding term and the kind of mutual fund scheme. Mutual funds can be categorised as equity-oriented or other funds for tax reasons. 

‍The recurring deposit and its interest are not tax-free. Because interest income is taxed, TDS is levied on recurring deposit returns. The returns must be revealed in the Income Tax Return (ITR) on an accrual, i.e., once a year. The investor's interest income is added to their ordinary income and taxed at the standard rates.

We’ve now understood each instrument's meaning and differences when gauging mutual funds vs RD. Now, when it comes to the actual investing part, which one of the two should you invest your money in? Let’s answer that. 

In a Nutshell

The most effective way to generate wealth is to set aside a predetermined monthly amount for savings or investments. Mutual funds and recurring deposits are the two most frequent ways of investing a set amount each month. 

Invest with Fi 

As a money management platform, Fi offers several investment options. Short-term or Long-term — investing with a simple swipe of your phone's screen is easy. Mutual Fund investments on Fi are commission-free. With its intuitive user interface, suited for novice & seasoned investors, you can select from over 900 direct Mutual Funds.

Read on here

Frequently Asked Questions

1. Mutual funds vs fixed deposits vs recurring deposits: which is a better investment?

When comparing fixed deposits vs recurring deposits vs mutual funds — fixed deposits and recurring deposit investments are low-risk & safe. Mutual funds have a moderate-to-high level of risk. The stock market or debt instruments decide the returns for mutual funds.

2. Are recurring deposits taxable?

The recurring deposit and its interest are taxable. Because interest income is taxed, TDS is levied on recurring deposit returns. The returns must be revealed in the Income Tax Return (ITR) on an accrual, i.e., once a year. The investor's interest income is added to their ordinary income and taxed at the standard rates.

3. Which scheme gives the highest rate of interest?

The interest rate varies across schemes. Additionally, the interest rate is directly correlated to risk. Recurring deposits have a lower interest rate. However, it is fixed, and hence there is no risk. While mutual funds have a varying interest rate higher than a fixed deposit rate, it also comes with risks. 

4. Which is a better-fixed deposit or a recurring deposit?

The fixed deposit appears to provide better returns. This is because the account holder deposits monthly in a recurring deposit, and thus the interest is calculated accordingly. The fixed deposit amount is often placed once and is a lump payment that receives a higher interest rate. Therefore, fixed deposits are more profitable. 

5. What are the disadvantages of a recurring deposit?

Some potential disadvantages of a recurring deposit include lower interest rates, fixed monthly commitment, limited liquidity, inflation risk and significant opportunity cost. Considering these disadvantages and evaluating your financial goals and risk appetite is essential before choosing a recurring deposit as an investment option.

Disclaimer

Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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