Include a mix of asset classes in your investment portfolio

6 MinsJune 8, 2022

Investors often compare mutual funds and bank fixed deposits. But the two are different financial products. Hence it is akin to comparing apples with oranges. Here is why you should invest in both.

Invest in ELSS Funds at the Beginning of the Year

Mutual Funds

If you want market-linked returns, don’t mind taking a calculated risk, are clear about your investment objective and the investment horizon, you could invest in mutual fund. Mutual funds are regulated by the capital market regulator, the Securities Exchange and Board of India (SEBI).

They can be classified into five broad categories:

  • Equity schemes –to generate capital appreciation over the long term.
  • Debt schemes to generate steady and regular income along with some capital appreciation, varying with sub-categories;
  • Hybrid schemes – to provide capital appreciation from equity assets and regular income from debt securities.
  • Solution-Oriented schemes – to generate income and capital appreciation in line with the goal the fund is addressing;
  • Other schemes Index Funds, Exchange Traded Funds, and Fund of Funds.

Within the categories listed above, there are sub-categories that address a set of investment objectives or needs. For example:

Equity Funds - Large-cap funds, large & mid-cap funds, mid-cap funds, small-cap funds, multi-cap funds, flexi-cap funds, focus funds value funds, contra funds, ELSS funds (also known as tax-saving funds), sector/thematic funds, and so on.

[Also ReadOpen a Digital FD in minutes]

Debt Funds - Liquid funds, overnight funds, ultra-short duration funds, low-duration funds, medium-duration funds, Short duration funds, floating rate funds, dynamic bond funds, long-duration funds, credit risk funds, gilt funds, etc.

Hybrid Funds - Aggressive hybrid funds, conservative hybrid funds, dynamic asset allocation / balance advantage funds, and multi-asset allocation funds, arbitrage funds, among others.

Solution-oriented funds - Designed for certain financial goals: viz. child’s future needs (higher education and marriage expenses) and your retirement amongst others.

Others - Gold and Silver ETFs and Gold and Silver Saving Funds allow you to gain exposure to Gold and Silver respectively. Index funds allow you to invest in stocks that constitute key equity and debt indices.

When selecting a fund to invest in, keep in mind your risk profile, investment objective, financial goal, and time to achieve your goals. Ensure evaluating the risk profile of the scheme, its investment objective and portfolio strategy.

Benefits of investing in MFs

  • You do not have to worry about tracking capital markets; a qualified and proficient fund manager at the fund house does it for you.
  • You can easily diversify your investments and gain from different investment styles as well as minimise your risk, by spreading investments across asset classes
  • You can invest a small amount of money – whether through a lump sum or Systematic Investment Plans (SIPs). The cost of investing is low and offers enough liquidity (you have the option to exit the fund unless the scheme is subject to a lock-in period).
  • You can also withdraw your investment at regular intervals by using the SWP (Systematic Withdrawal Plan) mode.

Bank Fixed Deposits

Bank Fixed Deposits (FDs) are a traditional investment avenues. If you are a conservative or a risk-averse investor, looking to build wealth securely and steadily without being exposed to market risk, want to address short-term goals, and/or save money for an emergency; you cannot ignore holding money in a bank fixed deposit.

Even for investors who can afford to take the risk, some portion of your portfolio must be held in bank FDs depending on the asset allocation best suited for you. In times of volatile equity markets and uncertain economic conditions, FDs will provide the much-needed security net for your portfolio, since the returns are fixed. You know exactly how much you will get at the time of booking the FD.

To get the maximum out of your investment in bank FDs, here’s the approach to follow:

  • Invest when interest rates are competitive so that it can yield a better rate of return and possibly counter inflation.
  • Select your tenure and plan thoughtfully considering the goals/s you are addressing. If you need a regular source of income (during the term of the FD), you may opt for interest payouts (monthly or quarterly) during the term of the FD. They will be credited to your bank account. But if you don’t need regular cash flow, there is a cumulative option.
ParametersMutual FundsBank Fixed Deposits
RiskLow-Medium-to-High Risk (depends on the type of scheme)Low-Risk #
Premature WithdrawalPermitted subject to Exit LoadPermitted subject to a penalty @
Cost of InvestingExpense RatioNo Cost
Tax implicationsCapital gain is taxable*Interest is taxable

# Under the DICGC, bank FDs up to Rs 5 lakh per depositor are currently insured. This includes the principal amount + interest per depositor (aggregating deposits for all branches of a respective bank).
@ There is some flexibility. For instance, Axis Bank does not charge premature penalty for FDs of more than 2 years tenure, if they are closed after 15 months.
*In case of debt MFs indexation benefit is available for long-term capital gains, which means after 3 years of investment, the gains are taxed after taking into account inflation index.
For illustration purpose only.

If you invest Rs 1 lakh (lump sum) in an equity mutual fund and a bank FD, these are the kind of returns you can expect:

Return potential

Bank FDEquity Mutual Fund
Lump sum Investment (in Rs)100,000100,000
Returns % (p.a.)5.6*10#
Tenure (yrs)33
Value of your Investment (in Rs)118,156133,100

*Axis Bank 3-year domestic term deposit taken on the assumption that interest is compounded quarterly over the investment tenure.
#Equity MF is assumed to clock a market-linked 10% CAGR over the investment tenure.
Mutual Fund investments are subject to market risks. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market.
(The table above is for illustration purposes only.)

It is important you own both bank deposits and mutual funds in your investment portfolio. The bank FD would earn you fixed, secured, and steady returns over the investment tenure, while an equity mutual fund has a higher return potential accompanied with commensurately higher market risk. Your portfolio will benefit from the better return potential of mutual funds and secure and steady returns of bank FDs.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

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