Difference Between FD vs Mutual Funds vs Gold vs Bonds

Investors have a variety of investment options available in the market. Having a bunch of options makes it more confusing to decide what’s better for them? When deciding on an investment option, fixed deposits come to mind as being one of the oldest options. But is it better or highly attractive options like mutual fund, bonds? Each of these instruments work differently and have its own benefits and risks. Understanding how they work and comparing key factors involved helps in making an informed decision. In this blog, we will discuss them and compare FD, mutual fund, gold and bonds for better results. 

Fixed Deposits (FDs)

Fixed deposit are deposits are where investors invest a lump sum amount for a fixed period and in return the bank provides interest on it. The deposit is fixed for a predetermined period and cannot be withdrawn before that time. The name is “fixed” for a reason as it is fixed for a time period and can be withdrawn only with a penalty. 

Mutual Funds

Mutual funds are pools of money from different investors to invest in a variety of securities such as stocks, bonds etc. which is usually managed by professional fund managers. When an investor invests in a mutual fund, they buy a unit of the fund thus contributing in the pool which is invested further in different securities. It usually comes in different types such as equity mutual fund, debt mutual fund and hybrid mutual fund. Equity mutual fund is where investment is invested in stocks, debt mutual fund is where investment is invested in bonds whereas hybrid is a mix of both equity and debt instruments. 

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Gold 

Gold as we know is a traditional investment option which can be both in physical or digital form. Investment in physical gold is common in India. Gold investment can be made in physical gold i.e. jewellery, coins etc and in digital form such as Gold ETFs, Golf Bond, Gold mutual fund etc.  

Bonds

Bonds is a fixed income instrument, which is a type of loan from an investor which can be anyone to the issuer i.e, government, corporation, etc. Whenever an investor buys a bond the issuer promises to repay the loan amount with a fixed interest at the time of maturity. Bonds have different types like government bonds, corporate bonds, Debentures, etc. 

Comparison Between Fixed Deposits, Mutual Fund, Gold, Bond

Now as you have understood each instrument and have basic understanding. Let’s have a look at a brief comparison on these instruments for better understanding: 

Expected Returns

• Fixed Deposits offer guaranteed but relatively lower returns. The returns are fixed at the time of opening of a fixed deposit account. Senior citizens get higher interest rates of about 0.50% -0.75%  than the interest offered to the general public. Currently Fds are offering around 6-7% in large banks and 8-9% in small finance banks.  
• Mutual Funds offer a higher return than fixed deposits but are subject to market risks. In mutual funds investment is made in a diversified portfolio which can be securities such as bonds, stocks etc. where return depends on the performance of these securities. The return is not fixed and guaranteed. 
• Gold investments offer a good return and have inflation-beating capacity. It does not have a fixed return but substantially offers growth over a period of time. 
• Bonds offer higher returns but are subject to market risk. Bonds prices fluctuate as change in the interest rate or market conditions. When interest rate falls down leads to a higher bond prices and higher interest rate can lead to a fall in bond prices. 

Risk Profile

• Fixed Deposits are risk-free as they offer guaranteed return and are DICGC insured for up to 5 lakhs per deposit per bank. FDs are much safer and offer a fixed return as compared to other instruments.
• Mutual Funds are subject to market risk and are highly volatile. They carry higher risks than other other investment options. The risk can be mitigated by diversification and long-term holding. 
• Gold investment is usually a low-risk investment option as the price fluctuates in the short term but in the long-run it offers a good return. It offers  
•  Gold’s risk is distinct– it doesn’t depend on a corporation’s health or a bank’s solvency, but rather on market sentiment and macro factors. It is an investment that is worth investing as it beats inflation in the long-run. 

Liquidity

• Fixed Deposit offers moderate liquidity as it entirely depends on the chosen bank and its policies. Usually breaking an FD comes with a penalty of 0.5-1% If you need easy liquidation it is advisable to look for banks with easy withdrawal facility. 
• Mutual Funds can be easily brought and sold making it a highly liquid investment. In mutual funds liquidity majorly depends on the assets in which investment amount is pooled. If the demand of that mutual fund is high it would have a higher liquidity and vice versa. 
• Gold has a higher liquidity, it can be easily liquidated. Gold investments come in different ways like physical gold, gold ETF, gold mutual funds and sovereign gold bonds and is the first preferred choice of investors for an investment. 
• Bonds have varied liquidity (generally low for direct retail trading). Bond liquidity comes with market risks hand-in-hand. 

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Taxation

• FD interest is fully taxable at the existing slab rate of your income tax. TDS of 10% is deducted on FD if the interest is above 40,000 or 20% if you don’t have a PAN card for the general public. In the case of senior citizens, the limit is 50000. 
• Mutual funds dividend is added to taxable income and taxed at the existing income tax slab rate. The Profits from mutual funds are known as capital gains and are taxable. The type and period of mutual funds affects the tax rate applied on capital gains from mutual funds. 
• Gold returns are considered as LTCG (long-term capital gains). The returns from Gold investment is taxed by 20% and 4% cess on long-term capital gains.
• Bonds have varied tax treatment as some bonds are tax-free. TDS is deducted on the interest earned from taxable bonds. 10% of TDS is deducted from interest earned for both the listed and unlisted Bonds. 

Conclusion

Choosing between FD, mutual fund, bonds or gold is totally up to the goal of the investor. It mainly depends on the reason you are investing, available investment amount, risk tolerance, etc. All these investments have their own benefits, so deciding what to choose is important. The key comparisons as discussed above, can help in deciding what to choose as per your goal.