When considering investment option, individual investors often have to deal with a confusing dilemma of choosing between a Fixed Deposit and Income funds often leaving them at crossroads.
Fixed deposits also known as term deposit refers to a sum of money that an investor chooses to deposit at the bank or financial institution for a fixed term thereby earning interest at a specified percentage for that duration. On completion of the term, the initial deposit is returned to the investor.
Income funds refer to types of mutual fund that primarily focus on generating income on a monthly or quarterly basis as opposed to capital appreciation. They may consist of various forms of money market instruments or company stocks that pay dividends to its shareholders.
It, therefore, becomes increasingly important to obtain a clear understanding of the two and the pros and cons associated therewith.
Fixed Deposits & Income Funds as Investment Options
Based on certain factors such as the investment horizon, safety & risk-factor, return on investment, withdrawal options, let us take a closer look at how these two options feature vis-a-vis for investment prospect
Safety of Funds Invested
Fixed Deposit are a safe investment option as opposed to other risk-bearing options since deposits up to Rs. 1 lakh is insured. In an event of the bank defaulting the investor is given a principal amount up to Rs. 1 lakh depending on the amount that was deposited and the insurance cover. Besides this, the capital invested is rated by credit rating agencies and classified by factoring the securities and commodities that have been invested into.
Income Funds are marred by volatile and fluctuating market rates and hence can be quite unpredictable. As such they may not provide a very effective hedge for the investments against the fluctuations of the market rates. The lack of rating system and over-dependence on financial analysis of investment portfolios call for investors with a high-risk appetite.
Return on Investment
Interest rates on fixed deposits are fixed and least subject to market turmoil. This provides stability to the investor as his/her investment if not prone to market volatility and financial planning becomes easy. As such the investor can easily calculate an expected amount to be received at the end of the investment.
Income Deposit don’t offer pre-determined rate of interest and it is subject to market fluctuations. There is an unpredictability factor involved as there is no guaranteed return on investment. The returns are based mainly on the dividends that the investor may earn based on the market fluctuations.
Terms of Withdrawal
The investments in fixed deposits are locked for a stipulated time period and hence the amount invested for that time cannot be withdrawn prematurely. In case of withdrawal before maturity period the fixed deposit needs to be broken drawing lower rate of interest and payment of a penalty.
Income funds allow flexibility in withdrawal as investors can withdraw their investments at any time without losing out on their interest. The income fund need not be dissolved as there is no lock-in period for the invested amount. Penalties may be charged on exiting the fund within a short duration.
It, therefore, ultimately lies with the investors to decide and choose between the two investment options or have a balanced mix of both to obtain a more diversified investing experience.