Fixed Deposits Vs Mutual Fund
Fixed deposit still remains the preferred investment vehicle, however, better returns offered by mutual funds will help tilt the balance towards MFs
Old habits die hard. Yet, we cling to our old habits even after realising that old habits can be damaging and against our own interest. The same applies to even our investment decisions. In a survey conducted by SEBI, bank fixed deposits (FDs) were used as a saving vehicle by 95 per cent of the persons who were surveyed. Compare this with the percentage of people that were using mutual funds (MFs) as saving vehicle—mere 9.7%! One of the reasons for such a difference may be due to the low level of awareness about MF products. According to the same survey, the awareness amongst investors about FDs was as high as 99.9 per cent, while for mutual funds, it was just 28.4 per cent. Although, the awareness is low in case of mutual fund products, it is not so low as to deserve such low investments in mutual funds.
The fact becomes even more stark if we take the return differential between mutual fund products (both debt and equity) and fixed deposits. Depending upon the time horizon for which one is investing, and the mutual fund product investor has opted for, the difference in return will be bigger or smaller. Nonetheless, most of the time, the returns given by mutual fund products will be more than fixed deposits and it increases as investment horizon increases.
The chart below clearly shows that most of the mutual fund products have performed better in all the time frames. However, the sharp fall in the bond prices of the government securities in the last one year has led to the underperformance of some of the funds in the shorter time frame. Nevertheless, in longer time horizon, every mutual fund product, including debt and equity, have given better returns than the bank fixed deposits.
The great shift
But slowly and steadily, investors are recognising the benefits of investing in mutual funds. The latest data shows that investors are using more and more mutual fund product to channelise their savings and there is apparent slowdown in bank deposits. Considering the number of mutual fund folios as an indication of number of investors leaning towards mutual funds, it is observed that the numbers have increased tremendously in the last few years. For example, at the end of March 2018, the total MF industry folio stood at 7.13 crore, which is an increase of 28.78 per cent over the same month last year. It is not only the number of folios that have increased, the amount invested in mutual funds has also increased by about 26 per cent in FY18 on a yearly basis. As against this, the total bank deposits grew by 6.7% in FY18 on a yearly basis. The interesting part is that the growth has been the slowest in a fiscal in the last several years. One of the reasons for such a dismal performance may be because of higher base of FY17 attributed to demonetisation. However, the lower returns offered by fixed deposits compared to the mutual funds cannot be ignored.
The above table clearly shows the advantage of investing in mutual fund products. The post-tax returns generated by both debt and equity mutual funds have easily beaten fixed deposit returns. What is also important to note is that the annualised return of fixed deposit is not able to beat inflation, whereas both the mutual fund products have been able to do so. The decision whether to invest in FD or MF will be entirely based on your risk profile and investment horizon. For a shorter duration, MFs may underperform (but not necessarily), however, over the longer period, MFs have proved their mettle, hence you can invest in mutual funds that suits your risk-taking ability. The experience of developed markets shows that the assets under management (AUMs) of the mutual fund industry are larger than the bank deposits. In India, however, bank deposits are still five times higher than investment in mutual funds. Going ahead, as awareness about the mutual fund investment and its advantages goes up, we will see the balance tilting towards mutual funds.
