FD vs. Lump Sum: An FD of ₹10 lakh or a lump sum of ₹10 lakh—which will generate more money after 10 years?

FD vs. Lump Sum: If you have a lump sum of ₹10 lakh, the question arises: should you put it into a Fixed Deposit (FD) or invest it as a lump sum in equity mutual funds? FD returns are fixed, and the risk is low. Equity investments are subject to higher volatility but offer the potential for higher returns over the long term.

Looking at returns alone isn't enough; one must also consider taxes, inflation, and risk. Let’s understand this with a simple calculation.

Investing ₹10 lakh in an FD

Let’s assume an average annual interest rate of 7.5% on the FD. If the interest is allowed to accumulate rather than being withdrawn, it will continue to earn further interest.

Over 10 years, ₹10 lakh could grow to approximately ₹20.6 lakh—a gain of about ₹10.6 lakh. This is merely an example; actual FD rates vary depending on the bank and the tenure.

Investing ₹10 lakh as an equity lump sum

Now, consider investing the same ₹10 lakh as a lump sum in equity mutual funds. Let’s assume an average annual return of 12% (note that this is not a guaranteed return). If an average return of 12% is achieved over 10 years, the ₹10 lakh could grow to approximately ₹31 lakh—an increase of about ₹21 lakh.

A direct comparison

Option                    | Investment | Estimated Return | After 10 Years

FD                          | ₹10 lakh          | 7.50%                 | ₹20.6 lakh
Equity Lump Sum | ₹10 lakh             | 12%               | ₹31 lakh

In this example, the equity lump sum investment yields about ₹10.4 lakh more, but it also carries higher risk.

What are the benefits of an FD?

FDs are not affected by market volatility, and the interest rate is known upfront. Therefore, an FD is a convenient option for those who want to keep their money safe and stable. This is particularly relevant if you need the funds within a few years; putting all your money into equity solely in the hope of higher returns can be risky.

How much risk is involved in equity? Suppose you invest ₹10 lakh and the market falls by 20%; the value of your investment might drop to around ₹8 lakh. A 30% decline could bring it down to approximately ₹7 lakh. However, with a 10-year horizon, there is an opportunity to recover from market fluctuations—provided you do not panic and sell your investment during a downturn.

What about taxes?

Interest earned on a Fixed Deposit (FD) is added to your taxable income; consequently, you do not receive the full benefit of the 7.5% interest rate, as you may have to pay tax according to your applicable tax slab. Equity mutual funds are also subject to taxation. If you sell after 10 years, you might be liable for Long-Term Capital Gains (LTCG) tax based on prevailing rules. Therefore, do not assume that the ₹31 lakh figure represents the amount you will receive after taxes.

Factor in inflation

Assume an average inflation rate of 6%. In that case, the purchasing power of today’s ₹10 lakh could shrink to approximately ₹5.6 lakh over 10 years. In other words, merely growing your money is not enough; it is essential for your money to grow faster than the rate of inflation. Considering inflation is crucial when making an investment decision.

So, which is better?

If your priority is capital safety and guaranteed returns, an FD is a better choice. However, if your goal is 10 years or more away and you are willing to bear market risk, a lump-sum investment in equity offers the potential for higher returns.

Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.