To accumulate funds, mutual funds and recurring deposits are among the most popular investment options. Mutual funds are investment vehicles that pool money from several investors. When it comes to the duration of investment, mutual funds are highly flexible. You can choose to invest for a short-term period (a few months to a year), medium-term (1-5 years), or long-term (5-10 years). The choice depends on your financial goals and risk tolerance.
On the other hand, recurring deposits are fixed-duration investments. They are mostly offered by banks and NBFCs (Non-banking financial companies). The standard tenure for an RD is usually one year. After this period ends, you cannot continue the same RD automatically. If you want to keep investing, you must start a new RD for another year or whatever period you choose as per the bank's provisions.
In this article, we will discuss the meanings of mutual funds and recurring deposits and examine some of the key differences between them.
Difference between recurring deposits and mutual funds
|
Recurring deposits |
Mutual funds |
Investment purpose |
Primarily used for savings and fixed returns |
Invested for wealth creation and potential growth |
Returns |
Fixed interest rates |
Market-linked returns, varying based on market performance and fund management |
Risk |
Low risk |
Varies based on the type of mutual fund, ranging from low to high risk |
Liquidity |
Generally less liquid, with penalties for premature withdrawal |
Generally more liquid, allowing investors to redeem units at any time based on NAV (Net Asset Value). Certain mutual fund schemes are subject to an exit load |
Investment amount |
Requires regular deposit (mostly monthly) |
Flexible investment amounts, varying from low to high |
Recurring deposits and mutual funds: Key differences summarised
Recurring deposits (RDs) and mutual funds are two distinct saving options. They differ in terms of investment frequency, returns, and market linkage. Let’s understand some major differences between these two options below:
Frequency of investment
When you invest in an RD, you need to deposit a fixed amount of money at regular intervals, usually monthly. This requires discipline, as missing a payment can affect your overall returns.
On the other hand, mutual funds offer more flexibility in how often you can invest. You can choose to invest weekly, monthly, quarterly, or even make a one-time lump sum investment. This allows you to modify your investment schedule as per your financial situation and goals.
Returns
The returns on RDs can be calculated easily as they are based on the interest rate provided by the bank when you open the RD. These rates are fixed, so you know exactly how much you will earn by the end of the term.
In comparison, the returns on mutual funds are variable. They depend on the performance of the fund's underlying assets, such as stocks or bonds. It must be noted that different schemes have different risk levels and potential returns. Hence, the returns are not guaranteed and can fluctuate based on market conditions.
Investment schemes
RDs are more traditional and do not offer different schemes or options. All you have to do is choose the amount and the tenure. It must be noted that in RDs, there are no variations or choices in terms of investment strategy.
However, when it comes to mutual funds, there are many different schemes and options. You can choose from equity funds, debt funds, hybrid funds, and more. It is worth mentioning that each scheme has its own investment strategy and risk profile. This variety allows you to pick a fund that aligns with your financial goals and risk tolerance.
Market linked
RDs are not linked to market performance and offer fixed interest rates. Hence, your returns are predictable and are not affected by market fluctuations. This makes RD a safe and stable investment option.
Conversely, mutual funds are linked to the market. Their returns vary based on the performance of the financial markets. This implies the potential for higher returns but also a higher risk, as the value of your investment can go up or down.
What are Mutual Funds?
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers, who make investment decisions on behalf of the investors based on the fund's objectives. Each investor in the mutual fund owns shares, which represent a portion of the holdings of the fund.
Mutual funds offer several advantages to investors, including diversification, professional management, liquidity, and convenience. They allow investors to access a broad range of securities with relatively small amounts of money, making them suitable for both beginner and experienced investors. Mutual funds come in various types, including equity funds, debt funds, hybrid funds, etc. Each catering to different investment goals, risk tolerances, and time horizons. Overall, mutual funds provide an accessible and efficient way for individuals to invest in the financial markets and achieve their financial goals.
Key Features of Mutual Funds
- Diversification: Mutual funds invest in a variety of securities, such as stocks, bonds, money market instruments, etc, spreading the investment risk across different assets.
- Professional management: Mutual funds are managed by experienced fund managers who make investment decisions based on thorough research and analysis, aiming to achieve the fund's stated objectives.
- Liquidity: Mutual fund shares can be bought or sold on any business day at the fund's net asset value (NAV), providing investors with liquidity and flexibility to access their investments when needed.
- Affordability: Mutual funds allow investors to participate in diversified portfolios with relatively low initial investment amounts, making them accessible to a wide range of investors with varying financial capacities.
- Transparency: Mutual funds provide regular updates on their portfolio holdings, performance, and expenses, enabling investors to make informed decisions about their investments. Additionally, regulatory requirements mandate disclosure of key information to ensure transparency and accountability to investors.
What are Recurring Deposits?
Recurring deposits are a type of savings scheme offered by banks where investors deposit a fixed amount of money at regular intervals for a predetermined period. At the end of the maturity period, investors receive the principal amount along with accumulated interest. Recurring deposits offer a safe and stable way to grow your savings.
Key Features of Recurring Deposits
- Regular savings: Recurring deposits enable individuals to save a fixed amount of money regularly, typically on a monthly basis, fostering a disciplined approach to savings.
- Fixed tenure: Recurring deposits have a predetermined tenure, ranging from six months to ten years, during which the depositor contributes a fixed sum regularly.
- Fixed interest rates: Recurring deposits offer fixed interest rates throughout the tenure, ensuring a predetermined return on investment, regardless of fluctuations in market interest rates.
- Low risk: Recurring deposits are considered low-risk investment options as they are offered by banks and the post office and are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to Rs. 5 lakhs per depositor per bank.
- Flexible investment amount: Recurring deposits allow investors to choose the amount they wish to invest regularly, making it accessible to individuals with varying income levels and financial goals.
Recurring deposit or mutual fund: Which is better?
Recurring Deposits (RDs) are ideal for short-term financial goals due to their fixed tenure and guaranteed capital. They offer a safe investment option with a predictable return calculated based on a fixed interest rate. Although the interest earned is taxable, the stability and security of RDs make them suitable for individuals who need to accumulate funds for upcoming expenses, such as within the next year.
Moreover, RDs are especially recommended for conservative investors or those just starting their investment journey. For example, people starting their first job can benefit from RDs by setting aside a part of their salary to build a contingency fund and achieve short-term goals.
On the other hand, Systematic Investment Plans (SIPs) in mutual funds are better suited for long-term financial goals. Unlike RDs, SIPs offer flexibility in investment duration. It must be noted that these funds carry market risks, but they also have the potential for higher returns compared to RDs. Experienced investors who understand the financial market and associated risks should consider SIPs. To pick the right scheme, they must evaluate their risk profile and investment horizon.
Hence, deciding whether to invest in a recurring deposit (RD) or a mutual fund is largely based on your specific financial objectives. You need to evaluate how much risk you are willing to take and how long you plan to keep your money invested. By considering these factors, you can choose the investment option that best fits your needs.
Conclusion
Both mutual funds and recurring deposits offer unique benefits and serve different investment objectives. While mutual funds offer the potential for higher returns and greater flexibility with comparatively higher risk, recurring deposits provide safety and stability. Understanding your investment goals, risk tolerance, and time horizon can help you choose the right savings option to achieve your financial objectives. It is essential to consult with a financial advisor to make informed decisions based on your individual financial situation and goals.
