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Fixed Deposits vs Debt Mutual Funds: A Comparative Analysis

Updated on: 22 Dec 2023 | 10 mins read

Investors looking to invest a considerable corpus to get safer returns after retirement generally park their money under bank fixed deposits or invest them in mutual funds. More specifically, such investors prefer investing in debt funds.

While bank FDs have always been a popular investment, some experts say that debt mutual funds are better than FDs because the returns are slightly higher. Both of these options are suitable for investors with low-risk tolerance.

What Is a Debt Fund?

Debt mutual funds are relatively recent investment options introduced in the Indian market. This mutual fund invests most of its corpus in debt securities such as government and corporate bonds, treasury bills, money market instruments, and more. All of these are fixed-income instruments that come with a pre-decided interest rate and maturity date.

In debt mutual funds, the capital from multiple investors is gathered together, and the fund manager invests it in various fixed-income instruments according to the scheme objective. According to historical data, debt mutual funds are less risky than equity or hybrid mutual funds.

Young individuals who have just started investing and some retirees may prefer parking their money under debt mutual funds rather than fixed deposits. These funds offer investors marginally better returns once the scheme matures.

What Are Fixed Deposits?

A fixed deposit (FD) is a type of financial instrument made available by banks or NBFCs that allows investors to lock in their money in an FD account of a bank or other financial institution for a certain period. Over this time, the deposit will generate a fixed amount of interest that can be reinvested or paid out monthly, quarterly, or annually.

Banks let investors choose the tenure to deposit their money. For example, you can deposit your cash under fixed deposit accounts from 7 days to 10 years. The higher the deposit year, the more interest you will receive from the banks.

Debt Funds Vs. Fixed Deposits

The difference between debt funds and fixed deposits is illustrated in the table below. This will help you understand whether debt mutual funds are better than FD.


FeaturesDebt Mutual Fund Fixed Deposits 
RisksInvestors will have to tolerate nominal risks.FDs carry relatively lower risk.
ReturnsThe returns are linked to market conditions.Returns are fixed irrespective of the market conditions.
Investment OptionsAs an investor, you will have the option to invest via lump sum or SIP.You will have to invest the entire corpus at one time.
LiquidityPeople prefer to invest in debt mutual funds because they have high liquidity.Fixed deposits can also be withdrawn prematurely. However, banks may charge a penalty fee.
WithdrawalDebt funds generally don’t carry an exit load except in a few cases, so you don’t always have to pay withdrawal charges.When you withdraw your money prematurely, you will have to pay a certain penalty to the bank.
Investment expenditureInvestors have to incur fund management charges as per the expense ratio of the scheme.There are no management charges involved in fixed deposits.

What Are the Benefits of Investing in Debt Funds?

Based on risk tolerance and other factors, the benefits of debt mutual funds are as follows:

  • Debt funds offer stable returns with a low risk of losses. Their returns are predictable even during periods of high market volatility.
  • Debt mutual funds have high liquidity, enabling you to withdraw your money at any time in the future.
  • People who invest in debt mutual funds are eligible for certain tax-saving benefits. If you hold any debt mutual fund for over 3 years, your Long Term Capital Gains will be taxed at 20%. In addition, you also have the benefit of indexed acquisition costs. Based on the past data, the gains on debt funds held for over 3 years virtually end up tax-free.
  • If you invest in low-risk funds, you will not have to worry about locking your money under the scheme for a certain period.
  • Debt funds also help people diversify their investment portfolios.

Factors to Consider Before Investing in Debt Funds

Below are certain things that investors should keep in mind before they invest in debt mutual funds:

  • Risk Factors: Investors should know all the risks accompanying investments in such funds. There are three main types of risks to consider: credit risk, liquidity risk, and interest risk. Debt funds carry relatively low credit risks but are not entirely free from interest rate risks.
  • Expected Returns: Like any mutual fund, debt funds do not guarantee returns because the returns are based on prevalent market conditions. However, if you observe the past performance of such funds before investing, you may invest in a well-performing fund.
  • Investment Objective: Sometimes, people invest in debt funds because they want a secondary or another source of income that can supplement their primary source of income. As an investor, you need to decide whether you are willing to pick an investment with risks if your goal is to create a secondary income source. You should invest in a debt scheme if its objectives align with your financial goals.
  • Time Horizon: Debt funds can be invested for short, medium and long-term durations. You should choose the debt funds based on your liquidity requirements and investment objectives.

What Are the Benefits of Investing in Fixed Deposits?

The benefits of depositing your money under fixed deposits are as follows:

  • Even if the market condition fluctuates, the returns from fixed deposits will remain unchanged. That means the interests on fixed deposits are fixed throughout the investment period.
  • Some investors may consider FDs better than debt mutual funds because they carry almost no risk. Even if a bank somehow defaults, which is less likely, deposits of up to Rs. 5 lakh are covered by DICGC insurance. Further, this insurance coverage limit is bank-wide and can be availed if you have FD accounts with different banks. However, if you have multiple FD accounts with the same bank, you’re only eligible for Rs. 5 lakhs across all the FD accounts and not for each FD.

Things to Consider Before Investing in FDs

Things to Consider Before Investing in FDs

Below are certain things that you must keep in mind before you deposit your money under any fixed deposit:

  • Compare and evaluate the fixed deposits various banks and other financial institutions offer.
  • Check if any bank is providing Flexibility in FD Tenure.
  • Choose a fixed deposit that meets your needs rather than one that is popular or that other people are investing in.
  • The DICGC cover on deposits up to Rs. 5 lakhs is only available in case of FDs opened with Banks.
  • Interest earned on fixed deposits is added to your total income and is taxed according to your tax slab. Hence, interest on FD can attract a tax of up to 30%.

Final Word

The above information can help you decide whether to invest in debt mutual funds or FD. Before investing, ensure that you understand your risk appetite and investment goals. Many debt funds have low risks and give optimal returns but are less safe than fixed deposits. On the other hand, fixed deposits yield low returns. Consider these factors to make an informed decision.


Who should invest in debt mutual funds?

The following kinds of people can choose to invest in debt mutual funds:

  • Investors with tenure above 3 years can prefer debt funds due to taxation advantage
  • People who are retiring soon, retirees, and beginner investors.
  • Risk-averse investors can choose debt funds.
  • Investors who wish to diversify their portfolio.

Who should invest in fixed deposits?

Fixed deposits are a suitable investment for the following types of people, and they can deposit their money if they wish to:

  • Individuals who are unwilling to incur any kind of market-related risks. 
  • People who want a stable and regular income every month. 
  • Individuals with ideal cash choose to deposit their money under bank FDs.

What are the different types of debt funds?

The different types of debt funds in which one can invest are as follows:

  1. Corporate bond fund
  2. Dynamic bond fund
  3. Money market fund
  4. Credit risk fund
  5. Liquid funds
  6. Gilt funds
  7. Floater funds
  8. Ultra-short duration fund 
  9. Low duration fund
  10. Short duration fund
  11. Medium duration fund
  12. Long duration fund
  13. Fixed Maturity Plans
  14. Medium to long-duration fund 
  15. Gilt funds with a 10-year constant duration
  16. Overnight Funds

What are the different types of fixed deposits?

Individuals can choose to deposit their money under the following kinds of fixed deposits:

  • Regular FD
  • Tax saving FD
  • Bank deposits
  • Company deposits 
  • Cumulative fixed deposit
  • Non-cumulative fixed deposit
  • Senior citizen FD
  • NRI FD

What are ultra-short debt funds?

Ultra-short debt funds are Open-ended debt mutual fund schemes that invest in bonds with a Macaulay duration ranging from three to six months.

Where do debt mutual funds invest?

Mutual funds focused on debt invest in fixed-income instruments, including government and corporate bonds, treasury bills, commercial paper, certificates of deposit, and other money market instruments.


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