When it comes to savings, most Indians believe that fixed deposits offered by banks are the safest and the most reliable investment avenue. It is like a financial tradition passed down to us by our ancestors, and rightly so. Fixed deposits allow you to invest a fixed sum of money over a fixed period of time at a predetermined rate of interest. Historically, fixed deposits were one of the highest-yielding investment avenues for investors with a lower risk appetite.

However, currently fixed deposits in India provide an interest rate of 6-8% p.a. on average. This is the nominal interest rate. Inflation in India currently averages at 4% p.a. This leaves us with a real interest rate of 2-4% p.a., which may not be attractive for investors with higher return expectations.

On the other hand, mutual funds are gaining popularity in India with increasing awareness and booming financial markets. Many people have been attracted to financial markets as they, too, want to see their capital grow at a faster rate. Mutual funds have proven to be a convenient mode of investment in financial markets.

Mutual funds pool money from multiple investors and invest in financial securities like equities, bonds, etc. Skilled and professional fund managers choose the securities to maximize returns for the investors. Investors will be issued a “unit” of a mutual fund that represents a share in the fund’s ownership. The types of mutual funds are based on the kind of securities the fund invests in, like equity mutual fund, debt mutual fund, hybrid mutual funds, exchange-traded funds (ETFs), index funds, and fund of funds (FOFs). More aggressive investors may invest in equity mutual funds for better returns and capital appreciation.

Difference between a Mutual Fund v/s 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.

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.