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Mutual Fund vs Recurring Deposits

Safeguarding the future financial needs is the main motive behind investments. Investing for the future is a healthy financial habit, if it is practiced on a regular basis. Savings clubbed with proportionate investments in the right financial tools will help in creating a huge financial corpus for a better financial future. While searching for best investment tools in the financial market, Mutual Fund and Recurring Deposit features in the list of investor’s preferences. Systematic Investment Plan (SIP) is an investment option that helps investing in Mutual Funds with small amount while Recurring Deposit is the tool offered by banks all across India. Both these financial instruments have peculiar benefits and features of their own.

Investors can choose the investment tool as per their financial needs. The investor can make an informed choice between the two investment tools based on various factors like expected results, risk associated with the investment, liquidity option, investment goal etc. Let us now understand both the financial instruments in depth.

Difference Between Mutual Funds vs Recurring Deposits

Mutual Fund and Recurring Deposits are two of the most popular investment tools that help in creating wealth. Both these financial instruments help in financial planning for long and short term investment horizon. Both the products have their own key features and benefits. Following table will illustrate the key distinct features of both Mutual Funds and Recurring Deposit and will help you in making informed financial decisions.

Key FeaturesMutual FundsRecurring Deposit
Frequency of investmentThe investment in mutual fund via SIP can be done on weekly, monthly and quarterly basis as per the convenience of the investorThe investment in Recurring Deposit is done at fixed frequency which is mostly monthly
Investment SchemesMutual Fund offers different schemes to the investors as per their investment objective. There are no schemes or options under recurring deposit, investor has no option to choose different variant or features under Recurring Deposit
ReturnsMutual Funds offer variable returns as per the scheme opted by the investor and performance of the scheme in the market. The investors as per their investment appetite choose the scheme and shall enjoy the returns.Recurring Deposit offer fixed returns based on the interest rate. The investors earn return as per the rate of interest offered by the bank on Recurring deposits.
Market LinkedInvestment in Mutual Funds via lump sum or SIP is market linked. The returns receivable by the investor are not fixed as they fluctuate as per market performance.Recurring Deposits of Banks are not related to market performance, and hence they offer fixed returns as per interest rates offered by banks
Maturity DateMutual Fund is for varying duration i.e. investment can be made for a period of short or medium or long termRecurring Deposits tenure is as per the provisions of the bank usually for a period of one year. The investor has to start a new recurring deposit at the end of tenure if they wish to continue the RD. Recurring Deposits have maturity date
LiquidityMutual Funds offer high liquidity. The investor can withdraw money at anytime however an exit load is to be paid if the withdrawal of the money is done within 1st year of investment.Recurring Deposits offer liquidity to the investor. Investors at any given time can withdraw the money invested in recurring deposit by bearing early-withdrawal charges.
Risk associatedThe risk associated with mutual fund is greater as compared to recurring deposits. The risk associated with mutual fund depends on the fund opted by the investor as the returns are associated with the market performance of the fundInvestment in Recurring Deposit is a safest investment as there is no risk of capital loss associated while investing in bank’s RD.
Financial AimInvestment in Mutual Fund aims in financial planning for all life goals.Investment in Recurring Deposit is usually aimed for wealth accumulation for short financial horizon

Returns in Mutual Funds

Returns in Mutual funds are calculated in form of cash/value appreciation. The returns earned in mutual funds are not always monetary, as sometimes these funds only offer returns based on appreciation of the value of the fund in which the investment is done. Following are the three ways in which returns in mutual fund is received:

Dividend

Investment in mutual fund refers to investing in stocks and shares, thus such an investment is eligible to receive dividend. The dividend received on investing in various funds is distributed by the mutual fund companies to the investors. The investor while making mutual fund investment has a choice whether to opt for dividend on a monthly, quarterly, half-yearly or yearly basis or whether to reinvest the dividend back into the mutual fund. Investors, as per their convenience, can choose the manner in which they want to receive the dividend payout.

Capital gain

All the funds in mutual fund scheme are backed by securities. If the price of a particular security in a mutual fund is on a rise and is sold by the mutual fund company, then the income received from such sale is considered as a capital gain. The mutual fund company at its discretion distributes such a capital gain amongst its investors, usually considered as a return on investment by investors. Such a capital gain is distributed annually by the mutual fund company to the investor.

Net Asset Value

The price that is paid for purchasing a single unit of the fund is called as the net asset value of the fund. The net asset value of the fund is determined by the performance of the fund in the market and the number of investors in a particular fund. The NAV of the fund is on a rise if the underlying asset i.e. stock or share is performing well in the market. An increase in the NAV will not result in monetary gain, but will surely increase the value of the investor’s mutual fund. The investor would earn money if he/she decides to sell some or all units of fund that has high NAV.

Thus, in the above three ways, returns are earned under Mutual Fund.

Returns in Recurring Deposit

The returns on recurring deposit are based on the pre-defined interest rates offered by banks. The investor can determine the best returns on recurring deposit by choosing the bank that offers high interest rate scheme on recurring deposit. Most of the banks in India calculate the returns on recurring deposit with the help of following formulae:

  • M = R [(1+i) ^n-1]/ (1-(1+i) ^ (-1/3))

In the above formulae;

  • M stands for maturity value,
  • R stands for monthly RD installments,
  • N stands for no. of quarters in a year,
  • I stands for rate of interest,

While calculating the returns receivable on recurring deposit kindly note, that interest on recurring deposit is compounded every quarter by most of the banks.

Benefits of Investing in Mutual Funds

Investing in mutual funds has a lot of advantages. The benefits of investing in mutual fund can be listed as under:

  • Liquidity: The investors can sell their units and redeem money against them. The value of the units is determined by the net asset value of the fund in which the investment is done.
  • Diversification: Investing in mutual fund allows diversification of risk. Mutual funds have a fair share of risk associated with them so the fund manager mitigates the risk by investing the capital collected in various classes of assets namely equities, debt instruments, etc. This diversification helps in reducing the impact of risk associated with the market performance of the funds. So when one fund is not performing, the other fund can compensate by offering higher returns so that the investor does not face any loss.
  • Professional Management: Mutual fund is professionally managed financial tool. The funds and schemes of mutual fund are overlooked by a professional fund manager who is responsible to take care of the investments by carrying out 360 degree research and then doing careful asset allocation. The fund manager is an important person while choosing your mutual fund company as he/she is responsible for investing your money in various mutual fund schemes and all the decisions related to buying, selling and holding of investments in mutual fund.
  • Cost Efficient: The cost required for the management of the asset portfolio is relatively lower than other counterpart investment tools available in the market. Trading in mutual funds by investing through the SIP mode is cost effective as compared to trading with stocks and shares in the market as various charges associated with trading namely transaction cost, brokerage, asset management charges etc. are comparatively lower.
  • Affordable: Investment in mutual fund is very affordable as investment can be done in smaller denomination. The transaction in mutual fund SIP can be done with minimal investment, thus resulting into reducing the overall transaction expenses involved in mutual fund investments.
  • Helps in achieving financial goals: Market is flooded with various types of mutual funds that focus on helping investors to cater their various financial needs. Mutual Fund SIP is a powerful investment tool that helps in achieving financial goals, whether small or big.
  • Tailor made: Investment in mutual fund is cost effective and the cost can further be efficiently reduced by choosing SIPs that have “0” entry load and exit load. Further, an investor can curtail the cost by keeping a close eye on the expense ratio. Thus, in this manner, an investor can customize their investment in mutual fund as per their financial goals and financial budget.
  • Hassle-free: Investing in mutual fund is a quick and hassle-free process. Once the investor decides the Asset Management Company and fund for investment, the rest of the process like starting a mutual fund SIP, investment payments in SIP is a cake-walk.
  • Automatic payments systems: Investing in mutual fund SIP has now become very easy and simple. The investors do not have to worry about the SIP payments as the asset management company directly debits the amount from the investors bank account.
  • Safety: Investment in Mutual Fund is very safe as the Asset Management Agencies come in the statutory purview of Securities and Exchange Board of India. Investors can verify the credentials of the mutual fund company. These governing bodies also act as grievance Redressal offices that are focused to work for investor’s interest.
  • Flexibility: Investment in mutual fund is flexible as they allow investors to choose investment as per their budget and convenience. Investor can either invest weekly, monthly, quarterly in SIP or can invest in lump sum as per their convenience.

Benefits of Investing in Recurring Deposits

Recurring Deposit is one of the age old investment tools offered by banks. Even today, many investors prefer banks recurring deposits for investing their hard-earned money. Following are the benefits of investing in bank’s recurring deposits:

  • Investment Goals: Recurring Deposit is the best investment tool while planning for achieving particular financial goal. Investors usually prefer bank’s recurring deposit while aiming to achieve short-term financial goal.
  • Liquidity: Investment in recurring deposit offers liquidity to investors. Investors can, at any given time, withdraw the invested money from the recurring deposit for satisfying their financial needs. Some banks also offer loan facility on the recurring deposits. Thus, in case of an emergency, investors can either dissolve their recurring deposit or make a partial withdrawal from their recurring deposit or can avail loan on it.
  • Risk-free: Bank’s recurring deposits are considered a very low-risk investment product because they bear a fixed interest rate. So the investors, even before making an investment, are well aware of the interest amount they are eligible to receive on their investment.
  • Returns: Recurring deposits offer higher returns on the investments. These returns are fixed by banks at a certain interest rate and they earn higher interest as compared to savings account. Also, the interest rates are compounded quarterly, thus offering higher returns as compared to bank’s savings account.
  • Minimum Investment: Investors can start investing in a recurring deposit with minimum investment amount as per their budget and convenience. Various banks have pre-defined their minimum investment amount so the investors can scout for the banks that offer minimum investment amount as per their budget and financial goal.
  • Promotes savings: Recurring deposit investment tool promotes and helps investors to inculcate a habit of perpetual savings.

FAQs on Mutual Funds vs Recurring Deposits

Is mutual fund better than Recurring Deposits?

Both the investment instruments have their own advantages and disadvantages. Mutual funds have risk associated with them as their performance is based on the market performance while Recurring Deposit has no risk associated with them. So the choice of investment tool purely depends on the risk appetite of the investor. Both the investment instruments give good returns while the returns in the recurring deposit is fixed as per the interest rate determined by the bank. The returns received from mutual funds are variable in nature as it depends on the fund and scheme opted for investment.

Do we get interest on mutual funds?

No, Mutual Fund is not a deposit scheme, so they do not earn interest on the investment. Mutual fund is an investment tool that is used by the investor to invest money in various securities like debt, equity, various instruments of money market etc and generate money with the help of these securities.

How do mutual funds pay?

Mutual Fund pays in the following three ways to the investor:

  • Dividend Payment: The investors are eligible to receive dividends on their investment. The securities or the fund in which the investor invests, earns interest which is distributed to the investor as dividends. The investor has a choice whether to receive these dividends or reinvest them back in the fund.
  • Capital Gain: When a particular fund or scheme under the mutual fund sells a high-valued security then it is a capital gain for the fund. Most of the mutual fund companies distribute such capital gain to the investors.
  • Net Asset Value: The value of the fund or scheme is represented by net asset value. When the value of the fund i.e. when the performance and the number of investment in a particular fund increases, the result is the increase in the NAV of the fund. Here, the investor does not receive monetary benefit rather the value of their fund increases. In such scenario, the investor might sell some units of the fund to earn money.

Thus, above are the three ways in which the mutual fund pays investors.

Are Recurring Deposits a good investment?

Investment in Bank’s Recurring Deposit fetches fixed returns based on the pre-determined interest rates by the bank. So, for investors who want to save a regular amount, Recurring Deposit is a good investment option. Moreover, Recurring Deposit is a safe investment tool as they do not carry any risk. Hence, an investor who has a low appetite for risk investment in Recurring Deposit is advantageous.

Are Recurring Deposits better than mutual fund?

Recurring Deposits and Mutual Fund both have their own features and benefits. Recurring Deposit is low risk investment tool while mutual fund bears higher risk. On the other hand, Mutual Fund has higher liquidity as compared to Recurring Deposits. So both the investment tools have their key highlights. The choice between recurring deposit and mutual fund is totally based on the investors’ appetite for risk and as per their financial goals.

Is it a good idea to invest in Mutual Funds?

Yes, mutual fund is a good investment tool that offers higher liquidity, higher returns and diversification of risk. So if an investor is looking for capital appreciation in a longer run, then investing in mutual fund is a good idea.

Is Mutual Fund is better than RD?

The choice between mutual fund and recurring deposit is totally dependent on the investor. If the investor has a good appetite for risk and wants a higher liquidity, then mutual fund is the best investment tool.

Is Mutual Fund investment safe?

Investment in mutual fund has risk associated with it as the returns are based on market performance, but investing in mutual fund is safe. Investing in mutual funds has become safe because the asset management companies are regulated by SEBI. This regulatory body keeps a close eye on the workings of the mutual fund companies. It also acts as a grievance Redressal office where investors can lodge complaints, if any. So, in short, investing in mutual fund is safe.

What is the interest rate on a mutual fund?

Mutual fund do not earn fixed interest rate as the returns are based on the market performance of the fund. However, investing in equity fund fetches higher interest rate as compared to debt fund or balanced fund. Thus, there is no fixed interest rate that is earned on mutual fund. The interest rate on a mutual fund is variable in nature.

What kind of investment gives the best return?

Investment in Mutual fund gives positive returns in a longer duration while recurring deposits is best suited for fulfilling short term financial goals. A mix investment using both of the investments tools can ensure best returns to the investor.

Where can I invest my money for a better return?

If you are aiming for long-term financial goals and have a good appetite for risk, then investing in mutual fund is the best option. However, if you want steady regular income and want risk-free returns, then it is best to invest your money in recurring deposits offered by various banks.

Which bank gives highest interest rate in India?

Almost all banks in India offer competitive interest rates on deposits. Investment under the senior citizen category shall fetch extra interest rate, as compared to the normal interest rates offered by Banks. Banks like ICICI Bank, SBI, Dena Bank and many other leading nationalized banks offer interest rates which are almost similar. Also these interest rates are subject to change, so it is always recommended to know the current prevalent interest rate offered by Bank’s and make an informed choice. Currently, Axis Bank is offering highest interest rate on recurring deposits in India (7.00% to 7.60% for normal citizens and 7.35% to 8.25% for senior citizens)

Which bank is good for Recurring Deposits?

Recurring Deposit is a safe investment tool. As an investor, you should opt for a bank that offers safety and good returns on your invested money. Few of the popular banks that offer attractive recurring deposit schemes are: ICICI Bank, Axis Bank, State bank of India, HDFC Bank and Allahabad Bank.

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