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FD Vs. Fund

I have invested in bank FDs but would like to know if I should stay invested there or invest elsewhere. Please also tell me if I should download fund forms or invest through an agent. - Suhas Sakarkar

I invested in bank fixed deposits in June 2007 for a one- year period with 9.5 per cent interest. I would like to know whether I should keep it there or invest it in a balanced fund like HDFC Prudence? Moreover, I would like to specifically know which other funds are available so that I can keep my capital with protection, earn a higher return than what banks are offering and have the flexibility to redeem it when I wish to. Furthermore I would like to know if it is cheaper to invest directly by downloading the forms from the internet rather than going through an agent as they may be contributing to costs by way of commissions.
-Suhas N Sakarkar

Near double digit returns on FDs that have been available for sometime now are soon being phased out. Even a pure debt mutual fund will find it difficult to compete with such returns. So if your primary concern is capital protection with an assured return then stick to a FD. However the obvious problem with FDs is their illiquid nature. But today the processes at banks are such that breaking an FD doesn't take much time and effort. As to your search for a good mutual fund goes, there is an inherent flaw in your comparison between an FD and a mutual fund. For one thing, mutual funds do not guarantee safety of capital and neither do they offer assured returns. At best you can pick a mutual fund that invests in highly secure instruments such as government bonds, but even on these investments you can expect a negative return over a very short term of a month or so.

Further, HDFC Prudence is far from being risk free. The fund generally invests about 75 per cent of its assets in equity funds. While the small debt component contains volatility, it does not insulate the fund from the risk of losing money and turning up negative returns.

As far as costs are concerned there isn't any difference between approaching the mutual fund company directly and going through an agent. But recently the Securities and Exchange Board of India (SEBI) has directed all fund houses to abolish entry load on direct investments effective January 4, 2008. So now if you download the application form yourself and invest directly you can save on the entry load (generally 2.25 per cent). Investing directly has certainly become cheaper.

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