Everyone has their own unique financial needs. Whether you are looking for a way to save for retirement, pay off debt, fund an emergency saving account, or just help your money grow faster – knowing the options available to you is key. When it comes to savings, investing, and growing money, two of the most popular choices are savings accounts and mutual funds. But which one should you choose?

Each of these financial products has its own unique benefits and features. In order to determine which one is right for you, there are five key points that you should consider – returns, risk, ease, liquidity, and taxes. Here’s a closer look at each one.

  • Returns

Mutual funds may offer higher returns than savings accounts, but the returns can vary depending on the type of fund you invest in. For example, equity funds have higher potential returns than debt funds over time. However, this also means that your principal amount is subject to market risks as well. On the other hand, savings account interest rates can be lower than mutual funds, but it’s more secure because your principal won’t fluctuate with market changes. 

  • Risk 

Savings accounts are insured by DICGC (Deposit Insurance and Credit Guarantee Corporation). As per DICGC rules, each depositor is insured up to Rs. 5 lakhs (principal + interest). Thus, an online bank savings account does not expose you to any significant risk of capital loss.

Mutual funds involve some risk because their returns can fluctuate significantly based on market conditions. As a result, you may need to diversify your portfolio across different funds and follow risk management strategies

  • Ease 

You can open a bank account with minimal paperwork, and it usually involves no costs or commissions in terms of depositing money into them. 

Mutual fund investments involve some paperwork but come with certain costs associated with it, such as entry load or exit load fees or commission paid when buying or selling units. This cost is usually negligible compared to the return generated from the investment over time.  

  • Liquidity

You can access money from your savings account anytime without any penalties or fees. With mutual funds, it may take some time to liquidate your investment, depending on the type of fund that you have invested in. For example, liquid funds have a maturity of up to 91 days, and ELSS funds (equity-linked savings schemes) come with a three-year lock-in period. 

Though there are some mutual funds that allow for same-day withdrawal amounts transfer, this does not match the convenience offered by savings accounts.

  • Taxes  

Whether you use an online savings account or invest in mutual funds, taxes are applicable. With savings accounts, tax is applicable for interest earned over Rs 10,000 in a year as per your income tax slab rate. You need to mention it under ‘income from other sources’ while filing an income tax return (ITR). Also, for senior citizens above the age of 60 years, this cap is Rs 50,000.

For mutual fund investments, including liquid funds, capital gains tax will be charged based on the investment tenure and the amount of gain.  

Closing thoughts

Taking into account age, liquidity requirements, risk tolerance, and financial goals can help point you toward making the decision between a savings account and mutual funds. If you prefer stability and liquidity in the short term, it might be a good idea to open a bank account. However, if you can afford to tie up money for a long time and are willing to take on some risk while aiming for potential growth, mutual funds investment may be worth considering.