What are Mutual Funds & Fixed Deposits?
A MUTUAL FUND is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets whereas a FIXED DEPOSIT (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account. It is known as a term deposit or time deposit in Canada, Australia, New Zealand, and the US, and as a bond in the United Kingdom. They are considered to be very safe investments.
What are Mutual Funds?
- A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. There are myriad kinds of mutual funds, each with its own goals and methodologies. Whether or not a mutual fund is a good investment is a matter of much public debate, with many claiming they are excellent for the average person, and others saying they are simply a poor way to invest.
- A mutual fund may be either an actively managed fund or an indexed mutual fund. Actively managed funds are changed on a regular basis by a fund manager in the attempt to maximize their profitability. The fund manager looks at the market and the sectors a fund invests in and redistributes the fund accordingly. An indexed fund simply takes one of the major indexes and buys according to that index. Indexed funds change much less frequently than actively managed funds, but in theory an active fund has more potential for profit.
- Many critics of mutual funds point out that scarcely over 20% of mutual funds outperform the Standard and Poor’s 500 Index. This means that nearly 80% of the time, an investor would have been more profitable by simply buying equal shares in all 500 of the companies currently on the S&P 500.
- Supporters point out that for most people the complications involved in traditional investment are simply not worth the effort. A mutual fund offers an easy way to invest in something with a higher return than, say, interest earned at the bank, while keeping funds somewhat fluid. It also eliminates the need to track the market oneself.
There are more types of mutual fund available than there are publicly traded stocks, making the process of choosing one a somewhat daunting prospect for most people. In general, it is good to look at a few types of mutual fund that catch your eye and investigate them to see if they fit your needs. The length of time you want to remain invested, associated costs, tax status, and whether a fund is closed- or open-ended may all prove important. The sector of investment for a mutual fund may also be something one want to look at. Many sector funds exist, and they are most often the top-performing mutual funds in a given year. The problem, of course, is guessing which sector will next see uniform growth, and avoiding sectors that can be hard-hit by single events, such as transportation.
Many people may also want to consider mutual funds which have specific social agendas, in addition to making a profit. A number of environmentally-friendly mutual funds exist which only invest in companies that meet certain best-practices criteria. Mutual funds based on other social views, political slants, and religious inclinations also exist.
Whichever mutual fund you ultimately wind up using, it is important to stay diversified. Having some money in long-term funds and stocks, with some in money-market funds and bonds, is always a smart way to plan for the future and any bumps that may occur in the market.
What are Fixed Deposits?
Fixed deposits are loan arrangements where a specific amount of funds is placed on deposit under the name of the account holder. The money placed on deposit earns a fixed rate of interest, according to the terms and conditions that govern the account. The actual amount of the fixed rate can be influenced by such factors at the type of currency involved in the deposit, the duration set in place for the deposit, and the location where the deposit is made.
The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a specified period of time. In most cases, fixed deposits carry a duration of five years. During that time, the money remains in the account and cannot be withdrawn for any reason. Individuals, corporate entities, and even non-profit organizations that wish to set aside funds and limit their access to the funds for a period of time often find that fixed deposits are a simple way to accomplish this goal. As an added benefit, the monies in the account will earn a fixed rate of interest regardless of any fluctuations in interest rates that apply to other types of accounts.
However, both these benefits can also turn into disadvantages under certain circumstances. Because the money cannot be withdrawn until the duration is complete, the funds cannot be used even in emergency situations. Changes in the going interest rate may also rise to a point above and beyond the interest rate applied to existing deposits. This means account holders are actually earning less interest with fixed deposits than with other types of loans and accounts.
While the interest rate on fixed deposits cannot be changed, there is sometimes a way to work around the issue of obtaining use of funds in an emergency situation. At times, the lending institution where the fixed deposit is placed may be willing to extend a separate loan to the account holder, using the fixed account as collateral. While not ideal, this can at least make it possible to deal with the current financial crunch.
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