Should You Break Your FD to Invest in Equity Mutual Funds?
Indeed, a common and relevant question when building an investment portfolio. The quick answer is: give preference to equity mutual funds when the goal is wealth creation or preservation, but you must have a longer time horizon. By investing in financial products that beat inflation over the long term, you will be able to create wealth. FDs may not even help in wealth preservation if you fall into a higher tax bracket (20% & above). However, equity mutual funds have the potential for higher returns and a higher probability of winning in a race against inflation over the long term.
In scenarios where we have recommended our clients to move funds from FDs to equity mutual funds include:
- Large sums invested in FDs but money is required after 5 years, so exposure to the equity asset class was recommended to achieve an optimum asset allocation mix.
- FDs were done at very low rates, such as 6-6.5%, which are subpar investments to continue given the current inflation scenario.
- Clients have goals like retirement and children’s education with a time horizon of more than 8-10 years. Money needs to grow at a faster rate to accumulate a large corpus, and keeping it in FDs will not suffice.
Managing volatility is a big issue for first-time movers from FDs to equity mutual funds. Setting the right expectations is key. Wealth creation is a long-term process requiring patience, discipline, and a well-planned investment strategy.
If you have a unique financial situation and need assistance, you can contact Truemind Capital, a SEBI Registered Investment Management & Personal Finance Advisory platform, at [email protected] or call at 9999505324.
FAQs:
1. What is the main difference between FDs and equity mutual funds?
Fixed deposits offer guaranteed returns at a fixed interest rate, while equity mutual funds invest in stocks and offer returns based on the market performance.
2. How do I decide between FDs and equity mutual funds?
Consider your financial goals, time horizon, risk tolerance, and current market conditions to determine whether FDs or equity mutual funds are more suitable for your investment portfolio.
Conclusion:
When it comes to deciding between FDs and equity mutual funds, it is essential to assess your financial goals, time horizon, and risk tolerance. Equity mutual funds are often recommended for long-term wealth creation and beating inflation, while FDs may not provide the same level of returns over time. Consulting with a financial advisor can help you make an informed decision based on your individual circumstances.