Why Do Indians Prefer Fixed Deposit Over Mutual Funds?

Ever wondered why many Indians prefer Fixed Deposit over Mutual Funds? When they say “Mutual Fund Sahi Hai” but immediately they also say Mutual Funds are subjected to market risks. Oh then it must be risky, is it? Let’s find out.

Fixed deposit has many advantages such as guaranteed and stable returns. You know exactly what you’re going to get at the end of tenure. Hence it’s easy to trust this investment class and plan your finances accordingly. Whether it be money for a child’s education or for their marriage. If you need to park your hard-earned money somewhere and need a guarantee then there is no better place than FD.

Since there is so much trust in FD, people often forget there are other alternate options for investment which they can choose based on their risk and goal. Hence, today I’m going to talk about fixed deposit as an investment and compare it with mutual fund and we’ll also try to figure out why many Indians still Prefer Fixed Deposit over Mutual Funds even if they want to remain invested for very long time.

First things first!

First of all, we must understand the fact that Fixed Deposit is a product of bank that these banks are selling and it helps them to make money for themselves, whereas Mutual Fund is a product for investment which makes money for investors.

When we invest in a fixed deposit, we are simply buying a product of the bank (de facto becoming a consumer) which many think they’re investing. As per the government statistics, the average annual inflation rate in India from 1969 until 2013 was 7.7%. How much interest do we get in a fixed deposit? 7.5%, 8%? Are we really investing?

Middle-class people consider money as a tool to buy goods as per their wishes or need. Whereas rich people consider money as a tool to make more money and build wealth. In order words, for poor, money is just money—spending money. For the rich, it’s capital to build more wealth. This is why when a common man gets a huge amount of money all of a sudden, they either spend lavishly or think of just preserving it by investing in fixed deposit, gold, or real estate instead of trying to multiple it by using the power of compounding.

Hence, the record speaks for itself. More than 70% of lottery winners become POOR in just 10 years of winning the lottery. And more than 90% of millionaires living today are SELF-MADE.

Why?

Because of the internet and access to easy information, becoming rich was never so easy. You have access to thousands of great books and people’s experiences—blogs like these. But on the other side, becoming poor was ALSO never so easy. You have access to Netflix, Zomato, Tinder, Instagram, Credit cards, and whatnot. Why work? When you can Netflix, chill and pay later?

Mutual Fund

Many Indians have little to no knowledge about how Mutual Fund works and what type of returns you can get from it. Less than 10% of household in India invests in Mutual Funds despite being so easily available in the market now. Even after so many advertisements about “Mutual Fund Sahi Hai”, people still ignore it like anything.

A report by a research firm suggested that people are holding back from putting their money into mutual funds thinking “its too risky” or because of lack of information on how mutual funds work. The survey was conducted between only those Indians with high savings and close to 40% of those who live in metros cities considered Mutual Fund to be very risky, whereas 33% of those in Tier II metro cities said they did not know how or where to invest in Mutual Funds. That, I think is the biggest problem because people are not curious to find out what actually it is.

It was the same story for Americans about few decades ago where people were reluctant to invest money in Index Funds and Mutual Funds. However, the number of people investing in Mutual Funds in USA has increased drastically to over 50% in the last few years because of which companies and start up gets funding easily and the economies grow. However, in India, we like to keep cash in our lockers, or give it to bank for Fixed deposit which banks give as loan, which is not good for investors neither for economy.

Types of Mutual Funds

There are various categories in mutual funds such as:-

1. Money Market funds
2. Debt/Fixed income funds
3. Equity/Growth funds
4. ELSS – Equity Linked Saving Scheme (Tax saver)
5. Index funds
6. Specialty funds
7. Fund-of-funds
8. Balanced funds
9. Gilt funds
10. Hybrid funds
11. Sector specific funds and many more.

You can invest your money in any of these options based on your risk-bearing capacity and goal. For ex. If you want to just park your extra cash for the ultra short term, then you can consider Money market funds. You can pick any random money market fund and you’ll see their past return rate would be more than 7-8% annually. The best part, you’re not locked in like a fixed deposit for years. The best place to keep your emergency fund is in treasury funds. Because the government can print money and give it to you if they fail to pay on time. But no banks ever have the power to print money. If they go bankrupt, you run a huge risk.

Growth Mutual funds can give you anything between 12%-16% compounded annually. However, the only condition is that you need to stay invested for long term such as 7-10 years or more as these are market-linked funds and you may see your principle amount going down instead of upwards. However, when remain invested for long term, it’ll cover it all.

If you’d like to what mutual fund as an investment is, then click here to read complete article

ELSS mutual fund not only give good returns but also tax benefit. Hence different types of funds come with different benefits. Many people do not know about these options hence they end up with the old traditional option of fixed deposit which banks take advantage of.

Want to find out list of all popular investment options India? Click here

Let’s look at some numbers

Let’s assume you had invested just Rs. 148 one time (lump sum) in any random index fund in 1981. I’m taking Sensex as the base and on the other side, you invest Rs. 150 in a Fixed deposit at 7.5% fixed interest during the same period. This is how the graph would look like:

Sensex jumped from 148 points to 36000 in 2019 (41000 now while I’m writing in December) and fixed deposit would give you a mere return of Rs. 2342. Sensex worked hard at 15.57% CAGR whereas fixed deposit stayed at 7.5%. Even though Sensex was just double than the FD in terms of percentage, the actual return is more than 15 times. That’s power of compounding for you.

My Story

I remember when I started earning during my teenage days, after accumulating a small amount of money, I realized very quickly that I had to put this money to work. It can’t just sit idle like that and only make about 4–8% returns annually. That curiosity made me to discover the world of finance and financial freedom. The more I dug onto it, the more I got curious.

However, the story is not same for everyone. People tend to ignore these important tasks of educating themselves because the concepts of personal finance are not taught in school. The loss middle class people bear for this ignorance is very high. Just to give you a small gist, even 1% difference in returns over long term can cost you lakhs. You have to educate yourself reading books, blogs, attend seminars and so on. Very few people do it and start investing. This is the real reason why rich become more rich and poor become more poor.

If you ask me, I have set up an SIP on few mutual funds where the amount is automatically debited from my account and invested. I do not even look at these funds very often to check how they’re performing. This is because I’ve invested that amount which I won’t need in near future. You should do the same by investing at least 10% (the more, the better) of your salary or monthly income and forget about it.

You should never wait for your next salary increase or next month. I’d suggest do it now, even with a small amount would be fine. Let it grow overtime and you’ll be surprised by the returns you get.

Finally, my favorite quote 🙂

Start saving when you have less, because it’ll become too difficult to manage if you have more.

Conclusion

There are plenty of people around you who do not know anything about Mutual Fund and don’t want to know about it. They are just happy with their limited knowledge. However, in order to build wealth and gain financial independence, one must manage finances on their own and that can only happen when they invest in their mindset. If you learned something from this then don’t forget to share with your loved ones.

Happy investing! ☺