Effective use of money definitely creates value, especially for NRIs and people in India looking for good investment opportunities. This article will discuss the difference between mutual funds as well as other instruments like Public Provident Fund, stocks, fixed deposits, and National Pension System. These distinctions are important for both shareholders and investors.
Comparison Between Mutual Fund And Public Provident Fund (PPF)
Investment Providers:
These are provided by Asset Management Companies while PPF is offered as a savings scheme by the government.
Risk Factor:
Mutual funds carry greater risk than PPF, which is considerably safer.
Returns:
Liquid mutual funds can give 5 to 6 percent returns each year, and even greater returns from equity mutual funds which can yield between 15 to 18 percent. PPF has a constant return of 7 to 8 percent.
Duration:
In the case of mutual funds there is no minimum duration and withdrawals can be done anytime, while PPF has a 15 year minimum lock in period.
Tax Benefits:
Investment in PPF is exempt up to 1.5 lakh, while only ELSS mutual funds give tax benefits.
‘Investment Type’:
While mutual funds invest in a range of securities, PPFs focus only on fixed return instruments.
Who Can Invest? For someone who wants to invest long term and make a moderate profit off of it, the PPF option is great. But if the priority is flexibility, liquidity, and greater profits, then mutual funds would be most suitable.
Mutual Funds versus Stock Market (Equity/Stocks)
Type of Investment:
While mutual funds invest in stocks, owning a company means full direct ownership of the stock.
Risk:
With stocks comes the high risk, while mutuals have the benefit of a risk that can be chosen by the investors (low-high) or automatically allocated through FMPs.
‘Return’:
It is recognized that mutual funds have good returns. However, one needs to recall that wise stocks will yield a great deal as well.
Level of Experience:
With mutual funds, no particular knowledge or skill is needed. With having stocks, an understanding of the market is required with robust research to support it.
Stability:
Stocks are notoriously unstable, and mutual funds are the opposite.
Ease of Use:
Investors do not do any work for themselves when funds are in mutual funds because the fund manager does all the work. On the contrary, a stockholder has a responsibility to monitor the company’s activities.
Expense:
In mutual funds, in addition to the charges for managing the fund, the shareholders have to pay for brokerage services and also for some entry and exit taxes on trading. Whereas in stock investment, the only expense that is incurred is the charge for brokerage.
Supervision:
All stockholders and stock investors have the right to control all the shares they own as assets, but in comparison, mutual fund shareholders are at the receiving end because they cannot choose the stocks they wish to buy.
Mutual Funds against Fixed Deposits (FDs)
Return On Investment:
While FDs are a good resource of funds because they give a constant return on all investments, mutual funds on the other hand give varying returns.
Risk Factor:
Morally, all FDs have no risk at all. While fluctuations in the market do incur some risk with mutual funds.
Expenses:
The expenses incurred with mutual funds are mainly management fees and brokerage commission while FDs incur no costs whatsoever.
Withdrawal Rules:
Withdrawals from mutual funds can be made anytime without penalty unlike withdrawals from an FD before the stipulated term which incur a fine.
Taxation:
Interests earned on FDs may be taxed as high as 34% depending on the slab rates while capital gains in mutual funds are taxed from 10% to 15%.
Mutual Funds and National Pension Scheme (NPS)
Risk Factor:
Unlike NPS, mutual funds have a more riskier approach and have greater chances of losses.
Returns:
NPS schemes have a lower return ranging from 8 to 10% when compared to the 6 to 18% returns of mutual funds.
Liquidity:
Mutual fund schemes have more liberal terms of withdrawal in comparison to the more stringent terms put on NPS.
Tax Benefits:
Exempt-Exempt-Exempt tax status is limited on tax payers under self-managed plans compared to NPS. ELSS is the only mutual fund which offers tax benefits.
Lock-in Period:
Mutual funds have no minimum lock-in period whereas NPS does have an age limit of 60 years for encashment of investment.
Market Exposure:
NPS and other pension funds are limited to investing in the market linked mutual funds only up to 50% – 75% of the fund valuewhile MF invest 100% in the market.
conclusion
Overall, same as with PPF and NPS, mutual funds have relatively better returns than FDs, But in addition to these pleasant conditions, mutual funds can be cashable at any given point in time without restrictions unlike NPS.
While stocks promises very high returns, they are the hardest to analyze and comes with the most risk.
FDs offer no risk, guarantee returns, and are thus the ideal choice for risk averse investors.
With regards to tax savings, NPS is helpful for future retirement planning.
Before choosing an option, all investors and NRIs looking to invest in India must analyze their risk appetite, goals, and cash flow. Knowing the differences between these assets make it easier for investors and shareholders to manage their portfolios to increase the rate of return while reducing the risk of loss.
