What Differentiates a Mutual Fund From Time Deposits
Mutual fund and time deposits are both instruments used to help build our wealth. Two decades ago, time deposit is the most famous investment instrument to put your money in. The reason is simple: high interest rates ranging from 15-20% gross per annum GUARANTEED. But those days are gone already. Time deposits can only earn you a measly 0.375% gross, which is wiped out by inflation.
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Stock Smarts Davao — October 20 – October 22, 2017
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How does mutual fund differ from time deposit?
1. On Yields
Mutual fund yield is not guaranteed. Because it is not guaranteed, there is a possibility for the investment to gain or lose. While in time deposit, the interest is guaranteed. Note that in mutual fund, earning is called gain and in time deposit, earning is called interest. The only negative thing about guaranteed is that although your money is guaranteed to earn interest in time deposit, it is also guaranteed to lose value due to inflation. On the other hand, mutual fund , being not guaranteed, has the potential to outpace inflation and grow your money better. Historical performances of the mutual fund show a very good average compounded return for the past 5 years, way way above inflation rate.
2. On Taxes
Mutual fund gain is not subject to tax while time deposit interest is subject to 20% with holding tax.
3. On Risk
Mutual fund investing has higher risk compared to time deposit. When investing in mutual fund, there is alignment of the type of fund the goal, timeline and risk profile of the investor.
4. On Leverage
In mutual fund, your money is pooled with that of other big investors where you leverage on the size of the fund and the expertise of the fund manager. In a time deposit, your money is alone and has less power to invest in higher yielding instruments. In mutual fund, your money has more exposure to opportunities while in a time deposit, your money has limited opportunities.
5. On compounding
In a mutual fund, the compounding is automatic (money works for you). In a time deposit, you have to renew so that your money can compound (you work for money).
6.On Retirement Planning
Mutual fund investing is best for long term (retirement) while a time deposit is only for short term (emergencies) like 30, 60, 90, 180 or even 360 days.
7. On the Minimum Investment
Mutual fund investing can start at Php 5000 and subsequent Php 1000 while time deposits usually are higher with the minimum amount depending on the bank discretion.
8. On Fees
Mutual funds have entry and exit fees while time deposit only has pre-termination fee.
Which is better? None because we need both products which will serve our goal. No product is better than the other as long as the said product is matched to your objective.