Dubai: As investments like Fixed Deposits (FDs) have long been a favourite among the investing community, many have often refrained from investing in Mutual Funds, and instead put their money in FDs, thinking the latter to be a much safer option of investment. But is this a prudent step?
“In the long-term, Mutual Funds have the capacity to provide FD beating returns, and are also considered to be a highly liquid investment, which is why Mutual Funds often times make a better investment option than FD,” said Zubair Shakeel, a UAE-based investment manager.
“However, both of these investment options are ideally the safer investment opportunities available in the market as compared to investing directly in the stock market. However, one may override the suitability for you based on your financial goals and risk appetite.”
In the long-term, Mutual Funds have the capacity to provide FD beating returns, and are also considered to be a highly liquid investment
Let’s explore the fundamentals of both fixed deposits and mutual funds and understand what shall be the best type of investment for you out of the two.
What are the benefits of Fixed Deposits?
Fixed Deposits, which are also called the term deposits, help the conservative investors to lock in their money for a fixed period to avail of a fixed rate of interest. Such deposits are safe as they do not result in loss and help you steadily grow your investment.
Such fixed deposits are also available in different types and have specified rates of interest available for people of the age below and above 60. The appealing feature of a fixed deposit is that it has no risk of investment.
Additionally, successive interest rate hikes recently make locked-in savings favourable for savers worldwide given that returns rise alongside rates, so you could be better off retaining some of your savings as deposits with banks for a given term or time period.
What are the benefits of Mutual Funds?
Mutual Funds have generally been an extremely popular choice of investment, specifically among the real-time investors of the country. It provides for moderate-risk and high returns and has been the favorite form of investment opportunity.
“Mutual funds at this age of investing proved with many options based on their investment objectives. Some mutual funds may appear to be lucrative due to their extremely high returns such as the small-cap funds but may entail huge risk as compared to the traditional fixed deposits,” added Shakeel.
“Mutual funds are also known to be the investment vehicles that are professionally managed to invest your savings in highly rewarding options. Such experts usually analyse the market and match it with your investment goals to fetch you appealing returns on your investment.”
Mutual funds at this age of investing proved with many options based on their investment objectives
Verdict: Should you invest in Mutual Funds or Fixed Deposits?
While both forms of investment have their fair share of advantages let us identify the major differences between the two. This shall help you to align the same with your financial goals and investment in the most suitable opportunity out of the two.
“A Mutual Fund generally provides higher returns than a fixed deposit. However, a Fixed Deposit shall provide you with a fixed amount of return on your investment,” said Brody Dunn, an investment manager at a UAE-based asset advisory firm.
“On the other hand, a Mutual Fund is generally suitable for a high capital appreciation. However, Fixed Deposits shall help you with a guaranteed return as well as secure your amount for that tenure.”
Most often Mutual Funds do not have a lock-in period, so they provide for higher liquidity than that of the fixed deposits. However, any such withdrawal may incur a cost, but no such cost is entailed in fixed deposits.
“Mutual Funds are subject to market fluctuations and therefore have more risk associated with it as on being compared to a fixed deposit which entails no such risks. Therefore if you are someone with almost no risk appetite, fixed deposits shall be your best bet,” added Dunn.
Every type of market investment carries some kind of risk. Changes large and small, whether in the specifics of your portfolio or the overall state of the economy, drive market fluctuations can impact your investments.
While the returns in an FD are guaranteed, the FD rates are low as compared to other market-linked investments. If you withdraw the FD before its maturity date, you will have to pay a penalty charge. You could also get a low interest on your FD if you break it before the date of maturity.
While mutual funds have many advantages – from the power of pooled investment resources to professional portfolio management – they are subject to the same market and economic forces that all investments face.
Investors who are risk-averse and want fixed returns from their investment can consider FDs
“Investors who are risk-averse and want fixed returns from their investment can consider FDs. However, if you have long-term investment goals and are looking for an investment option that can deliver higher returns, Mutual Funds can be an excellent option,” added Dunn.
“Or course, risk is part of any investor’s portfolio. Even if you didn’t invest at all, you’re facing an opportunity risk, which is the risk that you could have grown your wealth more by participating in the markets than sitting on the side lines.”
Most importantly, veteran investors widely recommend building a diversified portfolio that not only helps you reach your financial goal but also safeguards you from all the risks.