Which is better: Mutual Fund or Savings Account?

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Mutual Fund or Savings Account

Different kinds of investment options are available in India to cover the investment purpose of every individual. Considering this fact, two options that are liked by many people to make their money more effective for future purpose or ploughing money into the fund where they can get easy access are mutual fund and savings account.

Mutual funds and savings accounts are known for making small investments to accumulate the money for providing financial assistance to the investor. Both investment options come with many advantages, which make them suitable for investors. To establish which one serves the purpose of investment better, it is necessary to analyse the various advantages, features and conditions of these two investment options.

What is Mutual Fund?

Based on market capitalisation, mutual funds pool the money of the investors in different investments. Therefore, the mutual funds diversify the investment portfolio and reduce the risk factors by infusing money in different funds. A security that requires big capital can easily be purchased by accumulating small investments from different individual investors.

This collective instrument is managed by the professional management team who are specialised and qualified in managing funds according to the market rate fluctuation. So, you don’t need to keep a tab on market risks, as the investments are made based on a detailed analysis. You can choose to invest in a particular mutual fund according to the above-mentioned features. There are many mutual funds available in India such as the SBI mutual fund, L&T Mid Cap fund, HDFC Small Cap fund etc.

What is a saving account?

Savings account backed by the FDIC (Federal Deposit Insurance Corporation), deposits money in a bank at a certain rate of interest and is suitable for meeting short-term requirements. It provides a low rate of interest due to which it is considered as a risk-free investment and can be easily accessible at the time of urgent requirement. A Savings account mostly provides unlimited withdrawal facility due to which it carries high liquidity while earning interest at the remaining balance. But interest earned on a savings account is taxable.

Comparison between the mutual fund and saving account

Although both of these investment options provide ease of handling money in a convenient way while earning interest on it, you still need to understand their distinct functionality for executing your purpose.

Inflation-adjusted return

Investment is made for earning money in the long run to accomplish your future goal. But what will be the purpose of making an investment if, after a certain period of time when you withdraw your money, you don’t enjoy a good return on it? Interest paid on savings accounts is generally unable to emulate the inflation rate, due to which it is not a cost-effective option for the long run. For instance, if you are getting 2.5% interest on a savings account but the rate of inflation is 3.5%, then you are actually paying money to the bank for keeping your money.

On the other hand, in case of mutual funds where the money is invested in different stocks, equity, etc. for a long term period, which provides you with an interest of 9% to 10%, actually produces inflation deducted return. But it also carries a higher risk due to a higher rate of return.

Easy access to funds

You can easily access your funds in a savings account as per requirement for any online payment or emergency reasons. Contrarily, in case of mutual funds, you will enjoy the benefit of a high rate of interest in the long term, but before the completion of the redemption period, you’ll hardly get your estimated return.

You can withdraw your money by discontinuing your mutual fund account, but it will not be as accessible as a savings account, where payment can be made through various options.

Ease of opening account 

Different saving schemes are offered by the financial institutions for fulfilling your objective. To open multiple savings accounts, you need to verify many documents and are required to go through the prescribed processes by the banks. However, you can easily purchase mutual funds online by providing a common KYC document.

Risk factors

Savings accounts provide fewer interest rates, which makes it a risk-free return. Some of the best savings account schemes available in the market may offer a higher return. On the contrary, mutual funds such as the Reliance mutual fund, Axis Bluechip fund and so on are a risky investment as they maintain your portfolio by diversifying the risk of purchasing different securities available in the market. Investors need to bear the fluctuation of the stock market prices.

But if you want to make money by investing yours without taking high risk, then you can opt for the mutual fund options and invest in mutual funds online for easy access.

Cost minimization

There are some savings accounts that do not charge any minimal account maintaining fees. Nowadays, the savings account can be managed online as well. You can find the best online savings account as per your preference and for better access. Likewise, mutual funds pool investors accumulated money and invest it in different securities due to which the overall asset management cost is depreciated.

Keeping in mind the above-mentioned comparison between a mutual fund and savings account, there is a requirement of both the investment plans. A mutual fund provides a higher rate of interest on your investment to give you a large amount of money at the time of redemption. On the other hand, a savings account makes your fund available at the time of emergency, through different modes, like ATM, Net Banking, Debit card, etc.

You can choose any of these funds as per your future goal or requirement. The requirement varies as per the needs of the individual like if you need financial assistance after some years for funding your future goal, it’ll be best to invest your money in mutual funds. However, if you want to fulfil a short term requirement, like funds needed for purchasing a car or want flexibility in withdrawing money, then you should invest your money in the savings account. Considering many purposes from growth to a security facility, opting for these investment options give a similar ground to go for. But you need to compare these investment plans and decide which option will match your expectation.