Mutual Fund v/s Fixed Deposit: Which is the Better Investment Option?

Fixed deposits have always been the savings avenue for the masses. However, with the emergence of mutual funds, this trend seems to be changing. Mutual Funds are being discovered by more and more people. 

Yet, there are key questions from the masses that remain unresolved. What are Mutual Funds? How much risk do they carry? How are they different from fixed deposits? These are some of the questions that investors raise before investing in mutual funds. Let’s answer these questions and more:

Difference Between a Mutual Fund and Fixed Deposit


Particulars Mutual Funds Fixed Deposit
Fixed Rate of Return Mutual fund returns are dependent on market volatility. There is no guarantee of returns. Fixed Deposits have a predetermined rate of interest that will be payable over the fixed deposit tenure.
Taxation Capital Gains tax is applicable to mutual fund investments. Long-term and Short Term Capital Gains tax shall be applicable based on the holding period of your investment and the type of mutual fund. The interest rate on fixed deposits would be subject to the applicable slab rate of tax.
Liquidity Open-ended mutual funds can be redeemed as and when the investor requires, except for ELSS funds that have a lock-in clause for three years. A fixed deposit has to be made for a fixed tenure. In case of a premature withdrawal, it would be subject to charges (after the lock-in period)
Charges and Expenses A mutual fund charges specific fees for fund management which are deducted from the returns of the fund. No additional expenses over the tenure of the fixed deposit or at the time of commencement.
Risk The risk involved with mutual funds is higher as compared to fixed deposits. Fixed deposits provide predictable returns and hence come with lower risk.
Market- Linked MutMutual Funds invest in financial instruments like equities, bonds, etc., traded in various markets. Hence, returns are subject to price movements driven by supply and demand. Fixed deposits are not market-linked instruments in the sense that the returns, i.e., interest rate, are predetermined.
Managed By Asset management companies (AMCs) launch mutual funds that hire fund managers responsible for running the schemes. Banks and certain Non-Banking Financial Companies offer fixed Deposits.

What Are Mutual Funds?

A mutual fund is how you can invest in multiple investments such as stocks, bonds, and other marketable securities. It is an investment avenue where funds are collected from multiple investors and proportionally distributed to the investment portfolio. It is managed by a portfolio manager who is responsible for selecting, buying, and selling the portfolio securities.

A mutual fund can either be actively managed where the portfolio manager makes frequent trades to outperform the market or passively managed where the mutual fund solely follows the market index.

Benefits of Mutual Funds

Following are the ways in which investing in mutual funds can benefit you:

  • Risk diversification

As the funds are pooled in different types of market securities such as stocks, bonds, etc., the risk is distributed across various sectors. Diversifying investments significantly reduces the risk of the investor compared to investing in only one type of security.

  • Overtaking Inflation

Mutual funds have historically been proven to provide a higher percentage of returns compared to the rate of inflation. By gaining a return higher than the inflation rate, the investor can reach his financial goals quickly.

  • Liquidity

Mutual funds are quick to buy and sell compared to other traditional investment options such as fixed deposits or insurance term plans which have a fixed maturity period.

  • Expertise

Since mutual funds are managed by professionals, the investor gets the benefit of the expert opinion of the fund manager. The investor can rely on expert opinion instead of investing blindly.

  • Lower investment 

The investor can invest in multiple securities in the market with smaller contribution amounts as mutual funds pool the money from various investors.

What Is a Fixed Deposit?

A fixed deposit is a financial instrument that yields a fixed rate of return against monetary deposits. It is offered by banking institutions as well as Non-Banking Financial Institutions (NBFCs). The rate of return is pre-determined by the institution providing the facility and is fixed till the maturity date.

Fixed deposits have been one of the traditional investment avenues for decades. This is because they are relatively safe and provide a fixed return keeping the principal amount secured.

Benefits of Fixed Deposits

Some of the advantages of fixed deposits are as follows:

  • Safety

As fixed deposits keep the principal amount safe and guarantee a fixed return, the investment option is completely risk-free. Market fluctuations do not affect the return of a fixed deposit.

  • Stability

The returns are predetermined and provided throughout the deposit term, regardless of the market conditions. An investor can rely on the returns of a fixed deposit to plan for the future as they provide stable returns.

  • Ease of investment

A fixed deposit can be opened by anyone seeking to grow their funds in a simple yet effective way. The process is often straightforward and includes minimal paperwork.

  • Tax benefits

Some fixed deposits are eligible for a deduction of up to ₹1.5 Lakh under section 80C of the Income Tax Act. The senior citizens are eligible to receive tax breaks on their fixed deposit interests as well.

  • Tenure Options

An investor can choose the amount of time for the funds to be invested in a fixed deposit. The time frames range from a few months to several years. 

Mutual Fund V/S Fixed Deposit: Which Is Better?

After discussing the difference between mutual fund v/s FD, it can be understood that both these financial instruments play different roles in an investor’s portfolio. Further, while making an investment decision, one must keep their own risk and return requirements in mind. For instance, an investor with a short-term horizon and a low-risk appetite may find it more appropriate to invest in a fixed deposit than mutual funds. Similarly, a young investor with a long investment horizon would have a higher risk appetite. Thus, investing in a fixed deposit would mean that he is locking up his long-term funds at a lower rate of return.

An investor’s current asset allocation also helps determine whether a new investment should be in a mutual fund or a fixed deposit depending upon their ideal equity and debt allocation ratio. Keeping in mind the taxation of these two investment products would also aid in decision making. Since mutual funds are subject to capital gains tax, they are more tax-savvy than fixed deposits for investors falling in higher tax slabs.

Mutual funds cannot provide the safety of a fixed deposit. Though mutual funds help diversify risk by investing in multiple stocks or bonds, they are market-linked instruments. Hence, the returns cannot be free from volatility or fluctuations. In a fixed deposit, investors are guaranteed the predetermined interest rate that they shall receive annually. The only risk that fixed deposit investors face is if the bank/ financial institution becomes insolvent. Due to such incidents, there may be restrictions on withdrawal and the amount that can be withdrawn. Overall, fixed deposits are expected to give you safe and assured returns.

In the current scenario, as RBI has been cutting down interest rates to support the economy, many banks have brought down their interest rates. In declining interest rate environments, while deciding between mutual funds v/s fixed deposit, mutual funds may be a better option for investors looking at wealth creation. Based on the risk appetite, one may invest in debt, equity, or hybrid mutual funds after carefully considering their goals and constraints. Indexation benefits in the taxation of profits from mutual funds also have a considerable impact on the take-home returns of investors. For more clarity on taxation matters, investors may consult their financial advisors. To start investing in Mutual Funds, open your Demat account with Angel One!

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What are the different types of mutual funds?

There are various types of mutual funds catering to different risk appetites and investment goals. Some common types include equity funds, debt funds, hybrid funds, and balanced funds.

How do I invest in mutual funds?

To invest in mutual funds, you will need a Demat account and a Trading Account. You can open these accounts with a brokerage firm or online platform.

Are mutual funds safe?

Mutual funds are subject to market risks. While they offer diversification to reduce risk, the possibility of loss exists.

What is the minimum amount required for a fixed deposit?

The minimum deposit amount varies depending on the bank or NBFC. Some institutions offer fixed deposits with a minimum amount as low as Rs. 500.

Can I withdraw money from my fixed deposit before maturity?

Early withdrawal from a fixed deposit is possible, but it may incur a penalty fee.

Are fixed deposits taxed?

The interest earned on fixed deposits is taxable as per your income tax slab. However, there are tax-saving fixed deposit schemes that offer tax benefits under Section 80C of the Income Tax Act.