Fixed Deposits vs Mutual Funds

It is in our nature to be cautious - about anything and everything, especially about investing our hard-earned money. Naturally, when you are new to investing, you don't want to take too many risks, so as a novice investor, you tend to make safer choices.

Mutual Funds or Fixed Deposits

You might opt for fail-safe, fool-proof, slow-growing investment option like a fixed deposit. It could also be possible that you have a larger risk appetite after having some investment experience so that you could explore other investment options.

These investment options could have higher growth potential but equally high risk - for instance, mutual funds. How does one decide what a better investment option is? Fixed Deposits or Mutual Funds? To understand which investment option will best suit your needs, let's deep dive into an analysis of mutual funds vs fixed deposits.

Difference between Fixed Deposit and Mutual Fund

When you want to choose between mutual funds and fixed deposits, you need to bear in mind certain factors that will help you compare mutual funds and fixed deposits that will eventually help you make an informed decision. These factors include the risk involved, expected returns, tax benefits, entry or exit load, lock-in periods and withdrawals.


Fixed deposits are mostly risk-free, while mutual funds are subject to market risks. Fixed deposits earn you interest over a specific time, and the amount you will earn is guaranteed because it is determined by the rate of interest offered by the bank. Mutual funds, on the other hand, can fluctuate due to market conditions. Additionally, the type of mutual fund also determines the risk - equity mutual funds are high risk, while debt funds are low risk.

Expected Returns

Returns on a fixed deposit are determined by their rate of interest and time period. If you choose to keep a fixed deposit for a longer time, you can gain a higher amount of returns. Some banks even increase the rate of interest as the number of years is increased. This concept also applies to mutual funds. Financial advisors generally advise investors to stay invested in a mutual fund for more extended periods for higher returns. That being said, the returns on a mutual fund are entirely dependent on the performance of the stock market.

Returns on Investment

A Fixed Deposit offers pre-decided returns which do not change throughout the tenure of investments whereas offer better returns on long-term investments as they are market-linked. Longer the tenure of investment, better the returns from Mutual Funds.

Pre-determined returns are offered in a Fixed Deposit. The returns in an FD remain unchanged throughout the tenure of the investment. Due to their market linked nature, mutual funds offer higher returns on long-term investment. If the investment tenure is longer, the returns are higher in mutual fund.


As its name suggests, a fixed deposit is maintained for a specified period. An investor can break the deposit if and when they wish to, but they will be required to pay the penalty if broken before the specified time. Mutual funds investments can be withdrawn at any time unless there is a specified lock-in period viz. Equity Linked Savings Scheme.

Entry or exit load

Fixed deposits do not charge the investor for starting a fixed deposit, nor do they charge the investor once the fixed deposit matures. But if the fixed deposit is broken prematurely, there will be a penalty involved. Mutual funds, depending on the type of fund, can charge the investor an entry as well as an exit fee.

Tax benefits

A TDS of 10% is charged on the returns gained from a fixed deposit if the returns are above Rs. 10,000 in a financial year. All mutual funds are subject to short-term capital gains tax at 10% and long-term capital gains tax at 15% for earnings above Rs. 1 lakh in a financial year. In the case of debt funds, long-term capital gains are taxed 20% post indexation.

After Taxation Returns

In terms of after-tax returns, mutual funds provide better returns. Interest earned on FD is added to your income and then subsequently taxed. For instance, the taxation is the same if you sell your debt funds before 3 years. Returns are added to your income and taxed in accordance with your tax slab. The gains are treated as LTCG and taxed at 20% with indexation benefit, if investments are sold after 3 years. Indexation benefit also helps to reduce taxes in inflation.

Lock-in period

Fixed deposits lock your investment for the specified period chosen by the investor. The minimum lock-in period for a fixed deposit is generally one year. Mutual funds might have a lock-in period depending on the type of fund; this can usually range from three to five years.

FD vs Mutual Fund: Which is a Better Option?

Whether you want to choose FD or Mutual Funds, depends on the risk-taking capability of a person and the amount he wants to invest. FDs require a large one-time amount while investments in mutual funds can be started with 500 Rs. Investing in mutual funds can be a better option if you’re looking for better returns in the long-term. Likewise, you can make your financial goals.