When we talk about bank deposits and investment funds, the differences are enormous. They are two completely different financial products both of a legal nature, in terms of taxation. But the returns that are offered by them may vary.
In this article we will begin by describing the main characteristics of each of them, to end by showing all their differences. In short, it is about comparing the two most popular financial products: Funds vs deposits.
What are bank deposits?
A bank deposit contract is one by which a bank receives an amount of money from its client. With a commitment to return it in prefixed time and manner established. With the responsibility to pay the client an interest, previously agreed, for the money deposited.
In other words, it is a loan that the customer gives to the bank. The bank uses these funds for its financial operations.
Profitability and risk
One of the advantages of bank deposits is its simplicity in contracting. That means the client knows at all times how much money he is going to receive as interest on that loan. The money deposited is not listed on a market and has no possibility of overvaluing or undervaluing.
The capital is usually guaranteed as the Fixed Deposit Fund. This body compensates the client if the bank incurs insolvency or bankruptcy and cannot return the deposit. The RBI (Reserve Bank of India) covers a maximum of Rs 5 Lakh per holder.
The liquidity of bank deposits
On the other hand, when a deposit is formalized, a term is agreed for its return. The client cannot withdraw these funds during the life of the deposit until its maturity. Except by accepting a series of penalties for early cancellation.
In other words, a bank deposit is a savings product with penalty based liquidity.
But still, most of the experienced investors know the value of having the money invested at all times.
This is one of the main reasons why it is necessary to put our savings to work.
In this sense, since bank deposits are products that offer a predetermined rate of interest. They tend to be less profitable than any other savings and investment product (since the risk in this sense does not exist).
Taxation
In taxations, the interests of bank deposits are taxed as TDS (Tax Deducted at Source). In each settlement a tax of 10% is applied on the interest received, not on the capital deposited. Which can be annual, quarterly, monthly, etc . And it can even be deducted at the expiration of the deposit.
The returns obtained from these savings products (i.e. interest) become part of the tax base of savings. Which has a tax system of 10% TDS , only applied to returns if reached Rs. 40,000 a year.
If we take into account its low profitability and subtract TDS taxes, we can see how a bank deposit is not as profitable as it may seem.
What are investment funds?
The funds are collective investment: an investment operation designed for small savers to participate in financial markets and to invest their savings.
An investment fund, as its name already tells us, is an asset made up of a multitude of people, called participants. The fund is owned by the participants in the part that corresponds to them according to the invested capital.
This fund does not have its own legal personality, it is entrusted to a management company which is in charge of investing. Investing in a diversified portfolio of financial assets according to an investment policy.
Before continuing with the investment funds. It should be noted that investment funds are not guaranteed by any organization. Beside the Bank Deposits are guaranteed by RBI, whose objective is to guarantee. A guarantee that the investor will receive his money in the event of a bankruptcy.
How do you get a return on investment funds?
The returns obtained from these investments can be distributed among the fund owners in their proportional part. These returns can also stay within the fund, thus increasing the value of the assets. Therefore, the proportional share of each of the investors also increases when the fund is spiked.
Be that as it may, each participant is empowered to its proportional share of the returns that the fund’s investments can achieve.
There are investment funds of all kinds, adapted to all risk profiles and with a great diversity of investment strategies. The investor should only choose based on his personal criteria, his financial needs and the risk he is willing to take.
When a person wishes to participate in a fund, he only has to contact the management company in charge of buying shares in it and distributing it. Although who sells the shares and credits the money timely on your account.
The returns will come from the difference between the value of the shares at the time of purchase and their subsequent sale.
The liquidity of investment funds are totally genuine. The fund management company itself guarantees the power to buy and sell the shares in the fund, whenever desired and in the desired amount.
In return, investment funds do not offer a fixed return, and may even be negative. However, there might be some guaranteed investment funds in the market.
The taxation of investment funds
Wait there is more, the investment funds are not taxed while the money is invested. Accounts must only be taxed at the time of sale of the shares. In this way, when our fund is invested, our capital can increase without suffering the tax deduction.
And there is still more, if you decide to transfer the capital from one fund to another, it is not considered a sale and has no tax consequences. Investors have complete flexibility to adjust their investments based on the risk they are willing to take and market conditions.
What are the differences between deposits and funds?
In view of what has been stated in the previous points, we are in a position to understand the differences between deposits and funds:
- Profitability and risk: Investment funds do not guarantee a return (except guaranteed funds), it can even be negative. Meanwhile, bank deposits do offer a fixed return, however, it is usually very low due to the security they offer in this regard. But, in other terms, the returns on deposits can also be negative; It is not strange to find yourself in this situation.
- Liquidity: While investment funds offer total liquidity, bank deposits absolutely lack it with several terms and conditions. Liquidity is important, since, in view of having a better opportunity (that prevents us from obtaining negative returns). So in funds we can always rotate our investment. Adapting to changes is the key in the world of financial investing.
- Taxation: Although the same taxation is applied to the two financial products, the interests of bank deposits are subject to tax withholding. While in fund, the profitability achieved by a fund is not disturbed by the in-between taxations. Thus, the deposits can be taxed in a year and funds will not be taxed until the sale of the shares. On the other hand, funds are possible to rotate the capital from one fund to another without having to pay any tax for it.
As we can see, if we compare funds vs deposits , we conclude that investment funds can be managed with total flexibility to lighten to the maximum extent and the risk they present are totally worth in terms of variability in their returns. Meanwhile, the risk of deposits (low profitability and fixed return) is nothing and should not be addressed.
