Unlocking Growth: Why Mutual Funds Outshine Fixed Deposits for Long-Term Financial Success

Investing in mutual funds presents several advantages over fixed deposits, especially when considering long-term wealth accumulation and financial goals.

1.      Potential for Higher Returns: Mutual funds offer the potential for higher returns compared to fixed deposits. Over the past decade, equity mutual funds have delivered annualized returns ranging from 12% to 15% or higher, outperforming fixed deposits with interest rates typically in the range of 5% to 7% per annum. Similarly, debt mutual funds have historically provided returns of 7% to 9% over a 10-year period, surpassing fixed deposit returns.

2.      Diversification and Professional Management: Mutual funds allow investors to diversify their investments across various asset classes, sectors, and geographies, managed by professional fund managers. This diversification helps spread risk and may reduce the impact of market volatility on overall portfolio performance. Fixed deposits lack this diversification and are subject to interest rate risk.

3.      Tax Efficiency: Certain mutual funds, such as Equity Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act. ELSS funds have historically generated annualized returns exceeding 12% to 15% over a 10-year period while providing tax deductions to investors. Fixed deposits, on the other hand, offer taxable interest income at the investor's applicable income tax slab rate.

4.      Better taxation - Taxation on FD return occurs annually, regardless of whether you withdraw the funds or not. In contrast, with mutual funds (MF), taxes are only levied upon withdrawal. Additionally, the benefit of MF is that the taxes paid annually on FD returns can remain invested in the case of MFs, allowing for potential growth over time.

5.      Inflation Hedge and Real Returns: Mutual funds have demonstrated the ability to deliver inflation-beating returns over the long term, preserving and growing investors' purchasing power. Even after factoring in average annual inflation rates of around 5% to 6% over the last decade, mutual funds have delivered positive real returns, whereas fixed deposits' real returns have been relatively modest.

6.      Liquidity and Flexibility: Mutual funds offer greater liquidity compared to fixed deposits. Investors can redeem their mutual fund units at any time, subject to market conditions, while fixed deposits typically have a lock-in period. Moreover, mutual funds provide flexibility in terms of investment options and payout structures, catering to diverse investor preferences and financial goals.

In summary, investing in mutual funds offers the potential for higher returns, diversification, professional management, tax efficiency, inflation hedging, liquidity, and flexibility compared to fixed deposits. Examples from the past decade illustrate mutual funds' superior performance across various categories, reinforcing their attractiveness as a viable investment option for long-term wealth creation and financial planning.

Official data reveals that a staggering ~7.4 crore individuals in India are actively participating in SIPs worth ~19 thousand crore Rs monthly, reaping the rewards of mutual fund investments. If you haven't already joined the journey, it's high time to seize this opportunity and jump on board

 

This article has been created for knowledge-sharing purposes. Please consult with your financial advisor before making any investment decisions.

By - Ritesh Chaturvedi