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Fixed Deposit vs Mutual Funds

Updated on: 22 Dec 2023 | 10 min read

Currently, there are an array of investment options available that can accommodate almost every investor’s needs. Regardless of what option you choose, the goal is to maximise the risk-adjusted return.

At the same time, your investment decision should also be based on your financial goals, whether you want a fixed monthly income or want wealth over the long term. Either way, FDs and mutual funds are the two most popular investment instruments investors prefer.

While FDs have been the traditional choice among investors for decades, an increase in digitisation and high information availability has fuelled the demand for mutual funds in recent times. Increasing awareness among investors about the importance of having investments in their portfolios that fight inflation has led to a boom in the mutual fund market.


On the flip side, although mutual funds offer higher returns than FDs, they do not come with an assurance of returns. This is where FDs score over mutual funds and continue to attract investor attention despite changing times.

So, let’s compare FD and Mutual Funds to explore their pros and cons and understand which can be the right choice for you.

What is Fixed Deposit?

A Fixed Deposit (FD) or Term Deposit (TD) is an investment instrument where you deposit a lump sum at a fixed interest rate for a certain period. When you open an FD, the interest rate remains the same throughout the tenure, which can range from a few days up to several years. The rate varies from one financial institution to the other and is based on the investment tenure and deposit amount.

FDs can be cumulative or non-cumulative based on the interest payouts. In a cumulative FD, your deposit accumulates interest until maturity, and this interest gets compounded periodically. The interest earned every year is paid, along with the principal amount, as a lump sum upon maturity. On the other hand, a non-cumulative FD offers periodic interest payments, such as monthly, quarterly, half-yearly or annually as per your preference.


Fixed deposits continue to appeal to many due to their very low-risk nature and assurance of a return apart from this each depositor in a bank is insured up to a maximum of Rs. 5,00,000 for both principal and interest amount held by him/her.

What is a Mutual Fund?

A mutual fund is an investment instrument consisting of a portfolio of assets like stocks, bonds, gold, and other market-linked securities.


A pool of investors contributes to mutual funds schemes, which professional fund managers manage to maximise investor returns. Mutual funds are high-risk investments and offer high potential returns. However, the returns are not guaranteed and depend on the performance of underlying assets viz Individual Stock, Bonds, etc.

Mutual funds can be divided into three categories: debt, equity, and balanced. A debt fund focuses on fixed-income instruments such as corporate and government bonds; an equity fund focuses on stocks and related securities, whereas a balanced fund includes a combination of both types of investments.

Difference Between Mutual Funds and FDs

ParametersFixed DepositsMutual Funds
Return on investmentFixed deposits offer lower interest rates than mutual funds.Mutual funds typically offer better returns compared to fixed deposits in the long term but are subjected to market risk
RiskFixed deposits carry little to no risk. Returns are assured with fixed interest.DICGC, a wholly owned subsidiary of RBI, insures depositors’ amounts up to a maximum of Rs 5 lakh.Depending on the fund type, mutual funds carry moderate to high risk. They do not assure fixed interest or return due to their market-linked nature.
Choice of investmentYou can invest in the form of a lump-sum deposit.You can invest through monthly SIPs or by making a  lump-sum investment.
Investment AppreciationFixed deposits have a lower rate of interest compared to mutual funds Depending on the market, mutual funds may offer substantial capital appreciation.
WithdrawalDepositors can prematurely withdraw their FDs. However, a penalty will be charged for premature withdrawal. After a certain period, you can withdraw from mutual funds without incurring charges depending upon the type of the mutual fund. However, withdrawing before the specified period may attract exit load.
Investment costThere is no investment cost.It is subject to certain expenses or charges since it is managed by professional fund managers.
Lock-in periodFixed deposits are locked in for the duration of their tenure.Depending on the type of mutual funds, they may have no lock-in period. However, the Equity-Linked Savings Scheme (ELSS) has a lock-in period of three years.
TaxationFDs are subject to 10% TDS on interest earned above Rs. 40,000 in a financial year. For senior citizens, the exemption limit is Rs. 50,000.The interest you earn from fixed deposits will be included in your gross income and taxed according to your tax slab.With mutual funds, investors earn returns in two forms: dividends and capital gains, both are taxable. Dividends received on or after 1st April 2020 are subject to a standard TDS of 10% when the dividend income exceeds Rs 5,000. Taxation of capital gains depends on the type of mutual fund, as shown below:Equity funds:Short-term capital gains (<12 months) – 15% + additional charges.Long-term capital gains – Tax-free up to Rs 1 lakh, thereafter taxed at 10% + additional charges.Debt funds:Short-term capital gains (<36 months)- Taxed according to the tax slab of the investor.Long-term capital gains – 20% + additional charges.
Regulated byFixed deposits are regulated by the Reserve Bank of India (RBI).
The Securities and Exchange Board of India (SEBI) formulates policies, regulates, and supervises mutual funds for the protection of investors. A mutual fund is required to register with SEBI before it can receive funds from the public.

What Should You Choose – FD or Mutual Fund?

The decision between FD and mutual funds largely depends on the investor’s investment objectives and risk tolerance.
Mutual funds and fixed deposits serve different objectives, and both offer decent risk-adjusted returns.

  • Investment objectives
    Identify your primary investment objective. Think about whether you want to invest your funds for the short term, grow a corpus into a significant amount, or take advantage of tax-saving opportunities. Remember, these are only a few examples, and objectives may vary among investors. 
    For example, you may find mutual funds more lucrative if you are looking to build a significant corpus over an extended period. On the other hand, FDs may seem more suitable if your goal is to invest your money for a short period.
  • Risk tolerance
    Investors’ risk tolerance influences their choice between mutual funds and FDs.
    As explained earlier, fixed deposits are free from market risk and carry little to no risk. On the other hand, mutual funds are a marker-linked investment vehicle, and return on investment may vary based on the market performance. Sometimes in the edge case scenarios, investors might lose capital as well.

Fixed deposits and mutual funds both have their advantages and disadvantages. However, before making any investment decision, it’s always good practice for any investor to consider the features, expected returns, potential risk, and terms & conditions of the investment instrument and always try to diversify investments along the different asset classes.

Final Thoughts

Fixed deposits are still one of the most preferred investment options for many individuals due to their convenience and simplicity. Nevertheless, FDs don’t offer lucrative returns compared to mutual funds in the long term.

While mutual funds offer attractive returns, they also carry higher risks. However, mutual funds may be suitable for many individuals seeking to invest in a diverse market-linked investment vehicle.


Whether you choose FD or mutual fund, take note of their features, returns, and risks. It will help you ensure that they satisfy your investment needs as well as your risk appetite.


Is FD safer than a mutual fund?

As a comparison of FD and mutual funds, FD offers assured returns on your investment.
Fixed deposits are typically regarded as a safe investment instrument due to assurance of interest and principal amount upon maturity.

Does the mutual fund have risk?

Mutual funds are not risk-free. Since they are market-linked investment vehicles, their returns fluctuate based on market performance. A mutual fund’s risk factor varies depending on the type of its underlying assets.

Are mutual funds riskier than direct stock investments?

Mutual funds are considered less risky than stocks due to their diversity. Essentially, mutual funds contain a mix of investments and are managed by experts, so they typically carry a lower risk level than direct investments in stocks.

What happens if we break FDs before maturity?

Premature withdrawals from FDs can incur an interest penalty. Depending on the banks, it can range from 0.5% to 2%.

Can I open a fixed deposit online?

Yes, depending on the bank, you may open a fixed deposit online using the bank’s net banking facility.

What are debt mutual funds?

A debt fund is a type of mutual fund scheme that invests in fixed-income instruments, including corporate and government bonds, debt securities, etc.

What are the types of mutual funds?

Mutual funds fall mainly into three groups: Debt funds, equity funds, and hybrid funds.

Is FD protected?

Yes, the Deposit Insurance and Guarantee Corporation (DICGC) specialised division of RBI ensures depositors’ amounts up to a maximum of Rs 5 lakh.

Do mutual funds have lock-in periods?

Depending on the type of mutual funds, they may have no lock-in period. However, the Equity-Linked Savings Scheme (ELSS) has a lock-in period of three years.


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