Common answers to common questions-2

What is the major difference between Bank deposits and Mutual funds?

Banks make profits out of the spread between their cost of funds and return on funds. In other words, banks borrow money and lend it to others.They borrow money at a cost,one of which is the deposit rate of interest. The lend it to the customers at certain rate of interest. The difference between them is one of the avenues of profit for the banks, which is commonly known as" spread."

Till last decade, the interest rates were regulated by RBI. Now the banks have been permitted to manage the interest spread on their own, excepting savings bank interest which is still regulated by RBI. Thus to ensure profitability, the banks will not be in a position to offer a good rate of return, in case they do not face any resource constraints. Till recently, the banks were offering very low return when compared to the market and now with hefty growth in their credit portfolio, the rate of interest on deposits are on increase. But how long this trend will last?

The mutual funds offer better returns than the bank deposits, but certainly at a risk. Still there are certain funds available which offer marginally better returns for shorter period than the bank deposits and reasonable return on longer terms.

One of the important difference between bank deposit and mutual funds is:

The bank is under obligation to pay back the deposit along with contracted rate of return, irrespective of the nature of assets they have created out of the deposits. In mutual funds, the fund will pay only the value of assets it has created out of the funds it received. Thus there is inherent risk in investment in mutual funds. Still it is one of the best avenues of investment, ( Known as asset class in the investing parlance), every one should have. There are funds available to suit the risk profile of every investor.