If you are a basic investor seeking ways to secure a steady income from investment opportunities, you will have already met with your banker, possibly with a money manager too and read up daily business news. There are two safe alternatives for investment that don’t require you constantly looking up the daily price of a particular bond or share. They are fixed deposits and mutual funds. This article will give a brief introduction to both funds as well as explain how to transfer from a fixed deposit account to a mutual fund.

Fixed Deposits and Mutual Funds

Fixed deposits are a high yield investment in India, also knowns as term or time deposit funds in Canada, Australia, and the USA and as Bonds in the UK and India. They give higher interest rates than most saving accounts and in some instances, might require a separate account to hold them. Fixed deposits are considered to be very safe and give an interest rate of around 6-7%, the term of investment may vary from 7 days to 10 years. FDs are managed by banks.

A mutual fund is a pool of funds gathered from a group of investors. The sole purpose is to create a large fund for investing in a particular spread that will maximize the return on investment (ROI) within a pre-defined risk factor. Usually, the higher the return promised, the higher the risk factor since the funds will be invested in more speculative markets. Mutual funds are managed by asset management companies. They can be bought via the bank as well, since they are usually traded on the stock market. Alternately, you could invest using our platform, Investing in mutual funds using Groww is completely paper-less and safe. That means you can view their performance on a daily basis, but don’t expect any major changes since they are quite safe and tend to offer standard ROIs which set the tone for their market fluctuations.

The main difference between the two funds is in the management style and mode of investment. An FD is defined by a fixed term period (maturity). Removal from it before the term ends (maturity date) will require a process of a request. The actual process is fast, but it is still a process and could bring fines and taxes as defined by the FD contract.

Mutual funds can be bought into and sold out of just like any stock market trade. Taxes on equity mutual funds after a year from the investment is nill while for debt funds is 15% after 3 years from the investment. Moving money in and out of mutual funds is very convenient. 

How to Release Funds from an FD and Transfer to a Mutual Fund are:

  1. If removed before maturity date;
    1. Acquire the FD deposit certificate
    2. Pay the premature closing charges
    3. Prepare an official FD breaking request form at the bank
    4. After the release of funds, make the transfer to the mutual fund you have chosen
  2. If removed at maturity;
    1. Just transfer the funds to the mutual fund you have chosen

Removing your money from a fixed deposit account is not a complicated affair, you just have to make the decision to do so. However, we do suggest you consider all the alternative before moving your funds, and always look at the investment market from a mixed basket viewpoint. This means, don’t put your all your capital into one fund. Spread it out among a number of funds.

Choosing a Mutual Funds

Mutual funds come in various forms. There are basically 7 types:

  1. Money Market Funds – funds that invest in short-term securities such as government bonds, certificates of deposit and treasury bills. These are considered a safe investment but have a lower rate of return.
  2. Fixed Income Funds – they give somewhat fixed returns on investment similar to government bonds and high yield corporate bonds. Their goal is to maintain a constant income of money to the fund through the interest of their investments. This fund is also quite safe – only slightly riskier than money market funds.
  3. Equity Funds – these funds invest in stock market tradeable shares. They are of a higher risk level since they are dependent on continuous active management to buy and sell the fund’s invested portfolio, thereby maximizing returns. These funds give a higher return but are riskier since they are stock market reliant.
  4. Balanced Funds – these funds are a bit more secure that equity funds but riskier than fixed income funds since they balance their investment between secure sources and stock market shares.
  5. Index Funds – specialize in investing in stock market indices, so their movement is less erratic and the management is more passive which means they cost less to buy. They are slightly more secure than equity and balanced funds.
  6. Specialty Fund – they focus their investment in particular niches such as real estate, energy, commodities. They do not invest in speculative shares or sectors, so they are as secure as equity funds with a special market focus.
  7. Fund of Funds – these specialize in investing in other funds and thereby reduce risk considerably. However, they are reliant on the performance of other funds to produce returns.

A quick word about fund management: active fund management is a hands-on operation whereby the money manager will be constantly viewing market trends and making trading decisions on a daily basis. This generates a higher fund fee. Passive management is where the money manager will occasionally study market movement. They tend to concentrate on projected market direction rather than on single stock movements.

We suggest that once you decided to relocate your money from a fixed deposit account to a mutual fund, you take into account what your goals are for investment. Then we suggest you make a mix of investments, securing a low risk fund for security and high-risk fund for immediate retuns which will give you a greater purchasing power.

Final word, both of these investment types are not speculative, so don’t expect crazy returns or promises of high yield in short time periods. They are both different forms of secure investment, although the mutual fund does offer a larger variety of investment routes than FDs.

Happy investing!