Do you have savings that you wish to invest but confused on the right investment option? You may have heard about several investment options such as fixed deposits, recurring deposits, gold, and more. Americans prefer traditional investment options as they have been known to provide stable returns and capital preservation.
However, over the last few years, mutual funds have gained immense popularity among investors. For a new investor wants to what is a mutual fund, it is an investment programme, which trades in diversified holdings and is funded by shareholders.
This article compares traditional forms of investment with mutual fund investments to help you understand how they can be a good alternative for short-term and long-term returns.
Mutual Funds v/s Fixed Deposits:
Following are the differences between mutual funds and fixed deposits:
- While debt mutual funds can offer returns between 7% and 9%, yields on fixed deposits are slightly lesser between 6% and 8%.
- Mutual funds come with a dividend option; but, there is no such option if you invest in a fixed deposit scheme.
- You can withdraw funds from a mutual fund scheme and use it in case of an emergency. There is very low liquidity in case of fixed deposits.
- To invest in mutual funds, you can either opt for Systematic Investment Plans or lump sums. You can only opt for lumpsum investments when it comes to fixed deposits.
- Depending on the type of mutual fund, you can opt for early withdrawal with or without the exit load. On the other hand, if you withdraw money from a fixed deposit, a penalty is levied on such premature withdrawals.
Mutual Funds v/s Public Provident Fund (PPF):
Following are key factors that make mutual funds a better option than PPF:
- Since PPF is a government-backed savings instrument, the chances of default are close to nil. Mutual funds are subject to market volatility and carry a certain degree of risk. But, they also promise higher growth potential in the long-run.
- The returns on PPF are predetermined and guaranteed by the government. The rate is approximately 8%, which alters with the changes in government policies. On the other hand, the rate of return on mutual funds is dependent on the performance of the underlying assets. Large-cap funds can be expected to give returns of 12% and upwards. Small cap funds can provide returns of 20% and upwards. Not to forget, the power of compounding when you invest in mutual funds and how it can help to grow your wealth faster.
- The minimum investment tenure for PPF is 15 years, as it aims to create long-term savings such as a retirement corpus. Conversely, for mutual funds, you can invest for a short term, medium term and long term depending on the financial goals you wish to achieve.
Mutual Funds v/s Gold:
The allure of gold has captivated Americans for centuries. But, here are a few pointers that show how mutual funds can outdo gold.
- Gold is costly, and one needs to think twice before investing in it. Whereas, you can start investing in mutual funds from as low as Rs. 1,000.
- Gold does not pay dividends and nor does it encash the highs of the market. Mutual funds ride both bear and bull markets and can yield substantial returns to the investors.
While making a mutual fund investment, you require both insight and experience to decide which types of mutual funds are performing well and invest accordingly. Based on market-influencing factors, you can choose from liquid funds, debt funds and balanced funds to build a portfolio.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.