FD vs Mutual Fund: Everything You Should Know

When choosing between mutual funds and fixed deposits in India, investors often wonder which is the better investment option. FDs are the safest investment due to the guaranteed interest and principal upon maturity. The Reserve Bank of India regulates banks by implementing prudent lending standards to ensure that depositors’ money is secure. On the other hand, mutual funds have a long history in India since getting set up by the Unit Trust of India in 1963. Despite that, the popularity of mutual funds among retail investors has grown only in the last 20 – 25 years. While fixed deposits have traditionally been favoured due to their perceived safety and low risk, mutual funds have become more popular as investors seek better returns and diversified portfolios.

What is FD?

In India, banks, post offices, and a few deposit-taking non-banking financial companies (NBFCs-D) offer customers fixed deposits as an investment option. Banks and financial institutions offer competitive interest rates for these deposits, and the deposit term can range from as little as 7 days to as long as a decade. FDs have transformed over time into a flexible and adaptable financial product that provides a range of advantages to investors.

What is a Mutual Fund?

A mutual fund is an investment product provided by fund houses. It combines top-performing stocks and bonds from various sectors into a single portfolio. The fund manager determines the balance of equity and debt exposure depending on the fund category. This creates a diversified portfolio across equity and debt in different industrial sectors that offer a reasonable return, higher than that provided in FD, with risk lower than that of the stock market. The fund manager charges a fee, called an expense ratio, for creating and managing the portfolio, i.e. to buy, sell, or hold various securities.

Difference between Mutual Funds and FD

CriteriaMutual FundFixed Deposits
ReturnsMutual funds are market linked, hence dependent on the stock market’s performance; however, they are more stable as the risk is diversified into multiple stocks of different companies.Fixed deposits offer guaranteed returns at a predefined rate over a specific time period.
RiskThe risk involved in a mutual fund varies from one fund to another.FDs carry zero risk as the depositor receives guaranteed returns at a fixed interest rate.
ExpensesMutual Funds carry certain fund management expenses.FDs do not come with any expenses over the tenure of the deposit.
TaxationMutual funds are subject to short-term and long-term capital gains tax based on your holding period. A flat rate of 15% tax is charged for your short-term holdings, whereas for long-term holdings, 10% tax is charged on earnings above ₹1 lakh. In the case of debt funds, LTCG is 20% post-indexation.If you earn interest above ₹10,000 in a financial year, you are subject to 10% TDS. 

Why should you choose FDs?

  • FDs may be a good fit for risk-averse investors who prefer low-risk investments with guaranteed returns. It is also preferred by investors who do not wish to track their investment’s performance regularly.
  • Senior citizens seeking secure investment options with higher returns may be interested in FDs, as many banks offer favourable interest rates for this demographic.
  • FDs offer a range of tenures catering to shorter investment horizons. So it can be suitable for fulfilling your short-term financial goals.
  • Taxpayers looking to reduce their income tax liability can consider tax-saving FDs, which are eligible for deductions up to Rs.1.5 lakh under Section 80C of the Income Tax Act.

Fixed deposits (FDs) have been popular among Indian investors for decades. So people choose it without hesitation. However, recent violations of RBI norms have occurred, leaving depositors in difficult situations. Depending on the situation, such incidents can lead to withdrawal suspension, withdrawal limits, or an inability to withdraw funds indefinitely. Despite a few of these unpleasant occurrences, FDs remain generally safe and offer guaranteed returns.

Why should you choose mutual funds?

  • Mutual funds can be a better option if you are comparatively more risk-tolerant. It offers better returns and more favourable taxation. With mutual funds, tax is only paid when selling or redeeming units at a profit, unlike FDs, which are taxed while the interest accumulates. Additionally, mutual funds can help beat inflation.
  • Mutual funds can provide a good option for those seeking higher returns than what bank deposits offer. However, it’s important to have a sufficient investment horizon and be willing to accept some fluctuation in value.
  • Mutual funds can be a useful choice to diversify your investment portfolio because they invest in a range of stocks, bonds, and other assets.
  • If you want to invest long-term, you may find mutual funds attractive, as they can offer better returns than bank deposits over time.
  • By investing up to Rs 1.5 lakh per year in an equity-linked savings scheme (ELSS), a type of tax-saving mutual fund, you can build wealth and enjoy tax benefits simultaneously.

For example, let’s say your taxable income for the year is Rs. 10 lakhs, and you decide to invest Rs. 1.5 lakhs in ELSS. In this case, your taxable income will be reduced to Rs. 8.5 lakhs (Rs. 10 lakhs – Rs. 1.5 lakhs), and you will be taxed accordingly based on the lower amount. Assuming you fall under the 20% tax bracket, you can save Rs. 30,000 in taxes (20% of Rs. 1.5 lakhs).

Additionally, ELSS has the potential to offer higher returns compared to other tax-saving investment options such as Public Provident Fund (PPF) or National Savings Certificate (NSC). While there is no guarantee of returns, ELSS has historically performed well in the long run due to its equity-based investment strategy.

Another advantage of ELSS is its relatively short lock-in period of 3 years. It inculcates a saving habit, but at the same time, it is more liquid than instruments like PPF and NSC.

The inherent volatility of mutual funds is a deterrent for some investors, but it’s normal for market-linked investments. However, not all mutual funds are equally volatile, as the risk-return profile varies from one instrument to another. Starting with less risky mutual funds and gradually transitioning to riskier ones can help investors adjust to the volatility. Learning to tolerate volatility is key to investing in mutual funds.

Final Thoughts

Determining which option is best for an individual depends on their income, monthly expenses, and financial goals. Before deciding where and how to invest, it is important to clearly understand your goals and the features of both investment instruments. 


Can I switch from one mutual fund to another?

Yes, you can switch from one mutual fund to another. However, switching mutual funds may be associated with exit loads and other charges.

Can I get a loan against my FD or mutual fund investment?

You can get a loan against your FD or mutual fund investment. However, the terms and conditions vary depending on the bank or financial institution.

What are some examples of fund houses in India?

Some AMCs or fund houses operating in India are SBI Mutual Fund, HDFC Mutual Fund, Aditya Birla Sunlife Mutual Fund, Mirae Asset Mutual Fund, Axis Mutual Fund, etc.

Can I withdraw my money from an FD or Mutual Fund anytime?

FDs have a fixed lock-in period, and premature withdrawals may attract a penalty. On the other hand, mutual funds can be redeemed anytime, but some funds may have an exit load, which is a fee charged for redeeming the units before a specified time.

What are the tax implications of investing in FDs or mutual funds?

The interest earned on FDs is taxable per the investor’s tax slab. Mutual funds offer tax benefits under Section 80C and Section 10(38) of the Income Tax Act 1961. However, the tax implications vary depending on the mutual fund type and holding period. It’s advisable to consult with a tax advisor before making any investment decisions. For instance, from April 1, the profits made on investments in debt mutual funds, exchange-traded funds (ETFs), gold funds, and some other hybrid funds that invest less than 35% in equities of Indian companies will be subject to tax at the rate applicable to your income slab. This means that the previously available benefits of long-term capital gains (LTCG) tax and indexation benefits on debt mutual funds will no longer apply.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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