The world of investing is massive and with an ever growing number of options to choose from. You can never be too careful when it comes to your savings. In this article we will evaluate all the merits and demerits of the 3 primary options you have for growing your wealth, Fixed Deposits, Mutual Funds and Direct Investment.
Bank Fixed Deposit
Bank Fixed Deposits, also referred to as Term Deposits, are when you put a lump sum of money in your bank for a fixed duration at an agreed upon interest rate. In simpler terms, it’s like giving your bank a loan. The bank can use your funds to give other people loans or make investments but pay you interest annually.
Pros
- Fixed Deposits are the lowest-risk investment tool.
- You can use your fixed deposit as collateral for a loan at any given time with a loan amount of up to 90% of your deposit value.
- You can select the term which is usually from 6 months to 5 year. Your money remains 100% safe and will be returned to you at the end of the term.
Cons
- Although Fixed Deposits are low-risk they’re also low-reward when you compare them to other investment options.
- If you’re ever low on funds and decide to break your Fixed Deposit before the end of the term you will incur a penalty charge.
- The Interest returns are not tax-free. How much tax you have to pay will depend on the income slab you fall into after your interest returns are added to the rest of your taxable income.
- If you open a Fixed Deposit with a bank that is not stable, then you can lose the money in case the bank goes bankrupt.
Mutual Funds
A Mutual Fund is a pool of money collected from many investors that is used to invest in securities like stocks, money market instruments, government bonds and other assets. They are operated by professional Money Managers with expertise and knowledge on how money works in the world.
Pros
- Mutual Funds hedge your money, which is a financial strategy that involves diversifying investments to reduce risk.
- Mutual funds give you freedom of entry and exit and they can be bought and sold as easily as stocks
- Investors of Mutual Funds benefit from economies of scale, saving transaction costs by only having to purchase one security.
Cons
- High fees, commission and other expenses.
- The returns are taxable.
- There exists potential for management abuses and lack of transparency.
- The investments are subject to market risks and so your money can go up or down based on the market conditions.
Direct Investment
A Direct Investment is when you directly put your money into acquiring interest in an enterprise, which also gives you part-ownership and sometimes control over their affairs. Basically, it’s being the manager of your own money.
Pros
- Direct Investment gives you direct control over where your money is invested.
- There’s a much greater potential for high-rewards in short-periods.
- Complete freedom of entry and exit.
Cons
- Requires a lot of research effort.
- The risks are as high as the rewards and there’s potential for major losses.
- Can be stressful to manage.
Conclusion
Wondering which option to select? The short answer is, one that offers the ideal balance of risk, deposit value and reward with consideration to your current financial situation.
