Mutual Funds vs. FD's

Fixed Deposit or Mutual Funds – Where to Invest?

Fixed deposits or FD’s have traditionally been the go-to option for Indian investors. Latest data from the RBI shows that the total FD’s held in banks is close to Rs. 164 lakh Crores as on date. That’s more than 4 times the amount invested by us in Mutual Funds!

However, many people re now realizing that in order to beat inflation and meet their goals, they need to look beyond the traditional and take measured risks. Campaigns like “Mutual Funds Sahi Hai” have helped build awareness about mutual funds and how they can help investors create wealth. However, a lot of investors continue to be confused about whether they should invest into Fixed Deposits or Mutual Funds. Let’s simplify your decision!

Fixed Deposits are a simple product that solve a simple need – that is, they provide investors with low risk, predictable returns. FD’s provide simple interest that is paid out monthly, quarterly, bi-annually, or annually. The interest paid out on FD’s is taxable as normal income. Fixed Deposits are suitable for retired people who are looking to safeguard a part of their corpus in a low risk investment, or for anybody who is planning an investment for a short term goal – say, a car purchase or a family vacation a couple of years down the line.

The problem with FD’s is that they are incapable of creating long term wealth for investors!

Take the example of a fixed deposit that delivers a 7% return (this is usually the case when interest rates are high). At a 20% tax bracket, this would work out to just 5.6% per annum. For an individual in the 30% bracket, its even lower at just 4.9%. In other words, Fixed Deposit returns barely keep pace with inflation. In fact, they usually deliver negative real returns after taking inflation into account.

The problem with many investors today is that they allow their risk aversion to dictate their choice of investments and therefore blindly put away money into fixed deposits. This is a poor decision because it leads to huge opportunity losses for long-term wealth creation! Instead of avoiding risks, investors should try to understand risks, invest with proper expectations, and set up robust investing processes that help them overcome greed and fear driven traps that could derail their investing journey!

Unlike FD’s, Mutual Funds can help you create long-term wealth

While Fixed Deposits only solve the problem of low risk, short term investing, Mutual Funds are a more complete solution because there’s a type of fund that is suitable for every life stage and goal. From arbitrage funds and liquid funds for short term investing to small and midcap funds that can be long term compounders for goals like your retirement, there’s a fund available that can solve your investing need.

Customization is the key to success when it comes to Mutual Fund Investing! Consult with a professional Investing Expert to understand which mutual fund aligns best with your unique goals!

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FD vs Mutual Funds – A Simple Comparison


Fixed Deposits (FDs)

Mutual Funds



Market Linked


Usually low, unless you invest into low rated corporate FD’s

Depending on the fund type


No expenses

Have an expense ratio


High, but with a penalty

Generally high, but with an exit load

Investment amount

Specified minimum amount; often no maximum

Specified minimum amount; often no maximum


Fixed tenure (1 to 10 years)

Usually do not have a fixed tenure


Added to income and taxed

Taxable as capital gains

Fund management

No expert support needed

Ideally requires the support of an investing expert


Low, subject to a penalty

High, various types of schemes are available

Regulating authority

Reserve Bank of India (RBI)

Securities & Exchange Board of India (SEBI)

What about Debt Funds. Aren’t they just like FD’s?

Are debt mutual funds like FD’s? This is a common question that investors ask. Let’s explore the key differences between these two products.

Risk vs Reward

Traditionally, most debt funds have outperformed Fixed Deposits over the long term. However, its vital to understand that there are actually many different types of debt funds available, each of them having a unique risk profile. For example, GILT Funds, commonly perceived as risk free due to the fact that they invest purely into government securities, actually carry the highest degree of “interest rate risk”, or the risk of price volatility that arises from movements in underlying interest rates. When interest rates in the economy fall, these GILT Funds will outperform heavily – however, if interest rates were to rise (as they are now), they could even give you a negative return! Similarly, there are some funds that aim to earn higher returns by investing into bonds that are lower rated and have higher coupons or yields. Though these bets can pay off richly, leading to double digit returns, they can sometimes backfire too. The severe liquidity stress that many debt funds faced during the pandemic is a prime example.

How they differ from FD’s

Debt Funds differ from FD’s in many ways. Firstly, they do not give you a fixed rate of return. Unlike Bank FD’s, which lock in your interest pay out at a fixed rate (assuming your bank doesn’t go insolvent!) , your fund value can fluctuate in debt funds, based on market dynamics. Additionally, while FD’s provide returns purely in the form of interest pay outs, debt funds earn returns from interest (coupon) pay outs from their underlying bonds, as well as from capital gains that could arise if bond prices rise. Bond prices could rise when underlying interest rates fall, or if they are upgraded by a leading credit rating agency such as CRISIL or ICRA. Additionally, Debt Funds provide better exit options, allowing you to liquidate your money partially if the need arises. FD’s can only be ‘broken’ in totality, and this usually results in a penalty in the form of a reduced interest rate.

Should you go for FD's or Debt Funds?

Now that you’ve understood that Debt Funds are not “just like FD’s”, you’re in a better position to take an informed decision on them. FD’s are lower risk than debt funds, and less tax efficient too. Consequently, they usually provide returns that are slightly lower than those earned from debt funds. Your choice should depend upon your individual risk tolerance levels. If you’re investing into debt funds for the first time, choose those that have lower average maturities and higher credit profiles, and therefore carry lower risk.

Consult with a professional Investing Expert to understand which debt fund fits in best with your risk profile and investment objectives.


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FAQs – Mutual Funds vs FD

Which is better fixed deposit or mutual fund?

Both products serve different purposes. While fixed deposits are suitable for short term, low risk investments, they are not the best way to save for your future goals. A goal-based plan requires a more holistic approach to taking measured risks according to investing tenor.

Which is better SIP or fixed deposit?

A recurring deposit is a good option if you require funds within the next 2-3 years. For any objective beyond that, you should consider a SIP. For goals that are 3-5 years away, you could do a SIP in a hybrid fund. For longer term goals, SIP’s in equity funds can be done. However, make sure you understand the risks associated with equity SIP’s before you invest, as correct expectations are critical.

Why FD is better than liquid fund?

FD’s provide assured returns, whereas liquid fund returns are not assured. Both liquid fund returns and FD returns are taxed as short term capital gains. Hence, FD’s make more sense for short term investments in times when interest rates are high.

Debt Funds vs FD. Which one is better?

Debt Funds are different from FD’s, because they provide variable returns. They have risks that are different from FD’s – such as interest rate risk and default risks. Moreover, long term returns from debt funds no longer carry the benefit of indexation with effect from April ’23. For short term goals less than 3 years, sticking with FD’s makes more sense.