FD vs Mutual Fund - Know Difference between Fixed Deposit and Mutual Fund
How mutual funds are better than fixed deposits?
Since fixed deposits are perceived to be relatively risk-free, most people opt for them when it comes to their choice for saving money. Thus, fixed deposits have been a perennial favourite with Indian investors for decades. Saving money in the bank in the form of fixed deposits is equivalent to security and safety. However, it is crucial to introspect whether fixed deposits should continue to be a wise savings choice for millions of Indians. For instance, while fixed deposits can appear to offer attractive returns, the tax payable, based on the current tax slabs, for an investor may be on the higher end if they are investing in numerous fixed deposits of higher amounts. Also, given the rising rate of inflation, investing only in fixed deposits could actually turn out to be disadvantageous or even a loss-making proposition. The best option here could be to consider mutual funds as an alternative or at least an add-on to fixed deposits. Here, we take a detailed look into FD vs mutual fund.
In the debate between mutual fund vs fixed deposit, it is essential to note that currently, both mutual funds and fixed deposits are equally popular among investors. Both these investment avenues offer reasonable returns to investors over a period. However, they have their unique characteristics. The difference between fixed deposit and mutual fund lies in understanding how mutual funds can be better than fixed deposits. To know which is better FD or mutual fund, you may want to analyse both these investment options and weigh their pros and cons. Only then can you take an informed decision.
What are fixed deposits?
Fixed deposits are conventional financial instruments provided by banks and non-banking financial companies (NBFCs) to their customers. These fixed deposits, typically, offer a higher rate of interest than a regular savings account. In other words, when you deposit a pre-specified amount for a pre-specified tenure, you get a fixed rate of interest at the end of the tenure. However, if the amount in the deposit is withdrawn prematurely, the bank could levy a penalty and you may lose out on the interest your investments were to fetch. Under the ambit of fixed deposits, banks also offer recurring deposits and flexible fixed deposits, which may overcome some of the above-mentioned flaws but simultaneously reduce your returns.
Understanding mutual funds as an alternative to fixed deposits
Debt mutual funds are a type of mutual funds that offer a wide range of possibilities depending on your risk taking ability and multiple other factors. In actuality, debt mutual funds are almost similar to bank deposits, serving the same function and rivalling each another. However, the main areas of difference lie in taxation, liquidity, returns and safety. Mutual funds top the advantage in terms of tax-adjusted returns, rate of interest and liquidity, while fixed deposits may be considered safer by the larger populace.
Although bank deposits are regarded as the safest avenue to saving money in India, there has been historical precedence of local banks and cooperative banks defaulting on their customers' money. Hence, it may not be entirely true that fixed deposits are the safest savings instruments today. Fixed deposits that are locked in for a lengthy tenure could also face the risk of losing value in a scenario where interest rates are likely to rise. Although the risk can be in terms of opportunity cost, investors may not actually lose value when the deposit matures.
On the other hand, the yields from debt mutual funds are market-linked, thus the returns sometimes may not be as high as promised. Having said that, the mutual fund industry is stringently regulated and monitored by the Securities And Exchange Board Of India (SEBI). SEBI authorities have drawn tightly regulated guidelines that control the risk profile of investments, the risk individual funds are likely to face, valuation of investments, and how rigorously the maturity profile shapes the fund's clear goals. The measures laid down by SEBI have been highly efficient in curtailing risk and ensuring safety.
Why consider mutual funds over fixed deposits?
Coming closest to traditional fixed deposits, in terms of safety, debt mutual funds can be ideal. The primary objective of debt mutual funds is to provide its investors with steady income throughout the investment tenure. Hence, choosing a tenure in line with that of a debt mutual fund can be useful in getting desired returns.
Every fund house offers detailed information regarding various debt funds and their time horizon. This information can be crucial in helping you understand how the fund is performing with regards to interest rates. This can also help you understand market fluctuation and steer you to make informed choices while helping you take advantage of the right fund.
The most crucial difference between mutual funds vs fixed deposits India comes down to taxation. The returns received from fixed deposits are under the purview of interest income and are typically added to one's overall revenue. If you belong in the top tax bracket (30%), the taxed could eat a substantial portion of the returns. Besides, fixed deposits can also be a candidate for tax deducted at source (TDS) if the interest exceeds a certain amount.
On the other hand, tax rates are constant for debt funds, if held for 36 months or less. However, TDS is not generally deducted. If debt mutual funds are held for more than 36 months, the yields are classified as long-term capital gains. These gains are taxed at 20% with indexation.
With regards to liquidity, you could receive the proceeds from an open-ended debt fund within a period of 2 to 3 working days. Fixed deposits, on the other hand, could also be availed within a couple of days’ notice, but can attract penalties if the funds are withdrawn before its maturity.
Conclusion
At the end of the day, debt mutual funds can be a superior savings option over bank deposits with its capacity to offer better tax-adjusted returns, as can be seen in the market. At the same, since there is an element of credit risk and higher interest rate in mutual funds, you can be compensated with higher returns by investing in mutual funds over fixed deposits. But knowing the risks involved and choosing the right mutual fund can help you get the best yields from your savings.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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Mutual Fund Performance - Five ways to measure Mutual Fund Performance
Mutual fund investment plans have emerged as a preferred investment choice for a large number of investors in the last few years. Earlier, most of the households invested their savings in traditional investments like FDs, PPFs, and gold. However, the need for better returns from their savings and growing awareness of other investment options, have led investors to move away from traditional investments and explore other options such as mutual funds.What are mutual funds? In simple words, mutual funds are pooled investments from a large number of investors. They collect money from various individuals and entities that have a common investment objective and subsequently invest this pool of money in various stocks, bonds, and other securities. Thus, mutual fund investment plans allow you to distribute your invested money in a large number of securities than you could put in your portfolio. As a mutual fund investor, you hold units that represent a portion of your holdings in the scheme. Why is it advantageous to invest in mutual funds? Mutual fund investment no doubt is one of the smartest investments for almost any investor. Here are a few of its advantages:1. Simple A mutual fund is the simplest way to invest in capital markets for higher returns. If you are a novice but wish to invest in the capital markets, then mutual funds provide you with the simplest platform to invest in a healthy mix of stocks, bonds, and other securities.2. Easily accessible Mutual funds’ investments are easily accessible for all investors and as an investor, you can start investing in mutual funds for an amount as low as Rs. 500. 3. Diverse Mutual funds allow you to diversify your portfolio as you can gain access to different segments of the market through various mutual fund investment plans. Thus, you can invest in a variety of assets, sectors, securities, etc. 4. Professionally managed Mutual fund schemes are professionally managed by fund managers who have the expertise, time and resources and make sound investment decisions based upon the objective of the scheme.As the number of mutual fund schemes available in the markets has increased dramatically, evaluating the performance of mutual funds is of utmost importance to make wise investment choices. If you are wondering which is the best mutual fund to invest right now and how to evaluate the performance of mutual funds, then here is a simple guide for you. Top 5 measures to evaluate the performance of a mutual fund1. Compare performance with an appropriate benchmarkFor every mutual fund, there is a benchmark index to which you can compare the mutual fund performance. If your mutual fund investment is consistently generating higher than the benchmark, then it reflects the ability of the fund manager to manage the portfolio better. The important aspect here is to compare the mutual fund performance with an appropriate benchmark.Even when you are comparing it with different mutual fund schemes always look at the returns of other funds from the same category with a similar investment objective. Comparing the performance of a midcap fund with that of a large-cap fund would be like comparing apples to oranges. Hence, be careful and make relevant comparisons to see the performance of mutual funds. 2. Alpha Alpha of the fund helps measure the performance of the mutual fund on a risk-adjusted basis. Alpha takes into account the volatility of the mutual fund and compares the risk-adjusted performance of the fund to the benchmark. A positive alpha indicates that the fund manager has managed to outperform your mutual fund investments as compared to the benchmark. Similarly, a lower alpha indicates an underperformance of the fund as compared to the benchmark. Thus, the more positive the alpha of a fund, the better it is. 3. BetaApart from the risk associated with the security due to the nature of the asset class, every investment is exposed to a systematic risk which is due to the state of the economy or market in general and is unavoidable.The beta ratio captures this market risk of your investment. A higher beta indicates that the fund will be more volatile than the market. So, if a fund has a beta of 1.15 then it is 15% more volatile than the market. Note: Alpha & Beta both are risk ratios and are crucial means to find out the performance of mutual funds. The two ratios help you to determine the returns generated as compared to the risks undertaken. As an investor, you should look at funds that have a higher alpha and lower beta. 4. Portfolio diversification The advantage of investing through mutual funds is that they help you diversify your portfolio. A well-diversified portfolio helps you to mitigate the risks associated with investing in funds focussed on too few stocks or sectors or asset classes. So, to ensure that you achieve the desired results, you should review the holdings in your mutual fund. You can check the portfolio of your mutual fund by looking at the fund fact sheet. 5. Expense RatioOne of the biggest challenges for mutual funds is the high fees associated with it. Running any mutual fund involves costs that need to be borne by the investor. The expense ratio is the percentage of money spent to pay the salary of the fund manager, his team and other expenses. So, if the expense ratio of a mutual fund is high then it will reduce the overall returns generated by your mutual fund investments. So, while choosing a fund you should also see that the expense ratio is not very high. Here is a list of best mutual funds for 2019 across popular categories you may consider for investing now: The Bottom LineChoosing to invest in mutual fund investment plans is just the start of your journey as an investor. The important aspect of any investment decision is that it helps you achieve your goals within the desired time frame and considers your tolerance to risk. Mutual fund portfolios are tailor-made to meet your unique goals and are one of the best ways to achieve your investment objectives.So, if you want help with your mutual fund investment portfolio or you want to find the best mutual funds to invest now or simply want guidance, you can always seek assistance from a platform like IndiaNivesh. Their experts will help you build a portfolio that’s best suited for you.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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Buy IPO - Know How to Buy an IPO Online
An IPO or Initial Public Offering is a process that companies use to raise capital from the general public. In this, the company offers its shares in exchange for the funds invested by the public. These shares can be subsequently traded in the market.In short, it is a way through which a privately held company can get itself listed on the exchange and reach out to the public for its capital requirement by sale of its shares.Points to note when applying for an IPO• When one makes an application to buy an IPO, it is merely an invitation. It should not be confused with an offer. Only when the IPO issuing company offers the shares in exchange for money, does it amount to an offer. • Types of IPOThere are two kinds of Initial Public Offerings – Fixed Price and Book Built. In the case of a Fixed Price IPO, the issuing company determines the IPO price (sum of the par value and premium amount) in advance. Interested investors can buy the IPO only at the pre-determined price. In the case of a Book Built IPO, the issuer only announces an indicative range. The IPO's final price is decided through the process of book building. Generally, most of the IPOs these days are conducted through the Book Building issue process. • Classes of IPOsIPOs typically are categorized into three classes – Retail, High Network Individuals (HNIs) and Institutional. Investments till the value of Rs. 2 Lakhs are classified as retail. Who is eligible to buy an IPO?Any adult (someone who is at least 18 years of age) who is considered competent to enter a legal contract is qualified to buy during the IPO. The concerned person should have the following documents and accounts:• Valid PAN Card issued by the IT Department• Active Demat account (In case of an IPO, it is not necessary to have a trading account. A Demat account can suffice for this purpose. However, if the investor wants to sell the stock upon listing, then a trading account is required)Modes of investing in IPOEarlier when one wanted to invest in an IPO, he or she would need to reach out to a broker. The broker would provide a physical copy of the application form. The investor would need to fill it and submit the same along with the cheque for payment. The application money would get deducted from the investor’s account and balance (if any) post allocation would be refunded back. It was observed that this process was time-consuming and cumbersome. Hence, a need was felt to move to a more efficient model for investing in an IPO.ASBA – Applications supported by Blocked AmountASBA was designed as the answer to the issues faced during offline IPO applications. It is a process conceptualized and created by SEBI to streamline the online IPO process. With the help of ASBA, one can buy an IPO online without releasing the funds until the time the shares are allocated to them.This application provides an authorization to block the application money in the bank account, for subscribing to an issue. If an investor uses the ASBA feature, the application money is debited from the bank account only if the application is successfully selected for allotment. During the interim period (i.e. till the time the shares are allotted) one can earn interest on the blocked amount. This benefit is applicable if the money is held in an interest-bearing account.Considering the reach and ease of this application, Securities and Exchange Board of India (SEBI) made it compulsory for all IPO investors (for a public issue) to go through ASBA. This change has been in effect since Jan 2016. Some key advantages of ASBA are:• Investors do not need to pay the IPO application money through a cheque or other such facility• It eradicates the long-drawn process of refund of the money (the difference between application amount and actual allotment) by the IPO issuer.• It enables the investors to give authorization for the transfer of application money in the IPO application form itself. This ensures that the investors do not suffer from interest loss in the interim period.• Simpler application form• The IPO investor needs to deal only with a known intermediary such as their bank.Who can apply through ASBAIndividual investors who meet the following criteria can buy IPO (book building route) through ASBA:• He or she falls under the category of Resident Retail investor (is applying for securities whose value does not exceed Rs. One Lakh)• The bidding is being done at the cut-off value with a single option regarding the number of securities being bid for.• The funds being blocked for buying the IPO are held in an account with a Self-Certified Syndicate Bank (SCSB)• Has decided not to revise the bid value• The bidding is not being done through any reserved categoryHow to buy an IPO Online through the ASBA feature?The process to buy IPO online is extremely simple and hassle-free. One needs to follow the below-mentioned steps:• Log onto the online banking portal or net-banking account• Go to the section dealing with investments. There will be an option for buying an IPO or e-IPO. Click on that.• Fill in the required details such as depository information, bank account number, etc. and complete the process of verification.• Once the required information has been entered, the investor is led to a screen usually titled as “Invest in IPO” or something on the same lines.• Select the desired IPO. In a book building IPO, one needs to mention the bid price in addition to the number of shares• Read properly the “Terms and Conditions” of the IPO and accept the same for the next steps• If everything is in order, then confirm the bid by clicking on “Apply Now”Note: The list of the ASBA certified banks or partners is available on the website of NSE or BSE.With these technological advancements, it has become very easy to invest in an IPO. To make the process even better, one can reach out to financial experts such as IndiaNivesh. IndiaNivesh offers a wide range of financial services related to broking and distribution, institutional equities, strategic investments, corporate advisory as well as wealth management. Their research team studies the markets continuously and also lists out the top-performing IPOs for the benefit of the investors. All details are available at https://www.indianivesh.in/ipo-listing-details Final WordSo next time you see an interesting IPO coming up, you can buy the IPO online from the comfort of your home. In case IPOs are something that you would like to consider in the future, then we suggest you save or bookmark our tips on how to purchase IPO online. It will save you time in the future. And we all know that time is money! Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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