RD vs Mutual Fund: Which is better for your child’s education?
Investment is extremely important for your child’s future. But deciding the best investment tool is tough. Let’s look at Recurring deposits (RD) vs Mutual Funds to find out which tool can safeguard the future financial needs of your child.
Both Recurring deposits and Mutual Funds have their pros and cons. Let’s understand both of them in detail.
What are recurring deposits?
Recurring deposits are a monthly financial commitment that provides customers with the flexibility to invest a specific amount. It follows a proper flow of saving money with ease.
This facility is provided by most of the banks and NBFCs in India whose period can range somewhere between 6 months to 10 years.
Key features of recurring deposits
- The schemes offering recurring deposits aim to habituate people to a regular saving pattern.
- The amount that can be saved depends from one bank to the other and it can be as small as rs 10.
- The minimum period for which you can avail of the scheme is 6 months and the maximum goes up to 10 years.
- The interest rate will the same as that of fixed deposits offered in the same bank. Interest rates vary from 5.8% to 7.8%.
- It provides an additional benefit of taking a loan against the deposit which acts as collateral.
You can open an RD with your bank but remember that all RDs offer a fixed interest rate and are free of risk!
Additional read: Difference between ETFs and Stocks
What are Mutual funds?
Mutual Fund is a popular form of investment that acts as a financial tool that collects assets from different shareholders to invest in securities like bonds, debt, equity, stocks, and so on.
Each fund has a fund manager who looks after the performance, manages the risk, and allocates the fund’s assets.
Mutual funds are great for investors who cannot actively follow market performance and manage their investments on a daily basis. The fund manager acts as a custodian of your investments and takes calculated risks to provide maximum benefits!
Key features of mutual funds
- Mutual funds manage a portfolio that contains stocks, bonds, and other types of securities. Mutual funds invest in different markets, industries, and companies.
- They offer market exposure to new investors who can reap the benefits of various professionally managed portfolios at a very low cost.
- There are different types of mutual funds such as equity, debt, hybrid, and gift funds.
- Mutual funds charge annual fees and a commission for managing the portfolio which might affect your overall returns.
- The debt funds are relatively safer than equity funds or hybrid funds.
Additional read: Difference between ETFs and mutual funds
Difference between recurring deposits and mutual funds
- Frequency of Investment: Recurring Deposits require the investor to be regular and pay at fixed intervals of time whereas mutual funds involve frequencies like weekly, monthly, quarterly, and so on.
- Returns: The returns in recurring deposits are based on the interest rate provided by the bank. In the case of mutual funds, the returns are variable and depend on the scheme which is opted by the investor.
- Investment Schemes: There exists no schemes or options in the case of recurring deposits whereas there are various schemes available if you go for mutual funds.
- Market Linked: Recurring deposits offer fixed interests at regular intervals of time because they are not affected by market performance. In the case of mutual funds, lumpsum and SIP are subject to market risks. Hence, the returns are not guaranteed or fixed.
How can these financial commitments be useful for your child?
If your child is young and you have a low-risk appetite, then recurring deposits can be a safe play for you. You can deposit a specific amount every month in his or her name which can be helpful for their higher education. It has no risk which assures that you will receive a good corpus at the end of your savings tenure.
On the contrary, mutual funds are very effective if you consider the increasing rate of inflation in the domain of education. Equity is also a good option that you can go for.
Although, it is advised that you start these schemes well in advance so that you can counter volatility or crashes which may arise.
Consult an expert advisor to get the right plan
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