Fixed deposit or mutual fund – Which one is better for you?

Bank deposits, and fixed deposits in particular, have been one of the favourite financial instruments for Indian investors for decades now. As per a survey conducted in 2019 by securities markets regulator Securities and Exchange Board of India (SEBI), more than 95% of Indian households preferred bank deposits to other investment avenues. The only problem with fixed deposits is that the returns they offer are not attractive when compared to some other available options. This is where mutual funds come into the picture.

Mutual funds are pooled investment vehicles where an asset management company raises capital from different investors. Returns on mutual funds are comparatively better than those on fixed deposits, subject to market conditions. In recent years, mutual funds have also grown to be a popular investment avenue. As per statistics released by Association of Mutual Funds in India (AMFI), the assets under management for the Indian mutual fund industry has seen a 5-fold increase from June 2011 to June 2021.

Comparing fixed deposits vs mutual funds across different parameters – Which option is better suited for you?


When it comes to FDs, liquidity or the immediate availability of funds might not be concern, as you can quickly liquidate an FD, especially using the online modes. While you can redeem your fixed deposits even before their maturity date, the financial institution in such a situation levies a penalty. However, if you are invested in a tax-saving FD, your investment cannot be liquidated before the lock-in period ends.

Mutual funds are also considered liquid as investors can sell their mutual fund units as and when required. However, there is slight delay in receiving the amount in the bank account of the investor. Depending on the type of mutual fund you opt for, a nominal exit load is charged if the amount is redeemed prematurely. Also, if you have invested in a tax-saving mutual fund, then your investment would not be liquid in the lock-in period.


Returns from mutual funds are subject to both short-term and long-term capital gains tax. The tax rates are dependent on the type of mutual fund you have invested in and the duration of your mutual fund investment.

Interest earned from fixed deposits is also subject to tax as per the investor’s slab rate. The bank or financial institution can deduct 10% TDS if the interest earned in a year crosses a limit that is specified by IT laws. The limit is Rs. 50,000 for senior citizens and Rs. 40,000 for other investors.

Risk and expenses 

When it comes to risks, mutual funds are subject to market risks, which vary according the fund you invest in. On the other hand, there is no market risk associated with FD investments. Expenses related to the mutual fund include certain charges for managing the funds. In contrast, fixed deposits don’t come with any such charge. Accordingly, for a fixed deposit the returns are guaranteed and pre-determined before you invest, while the returns from a mutual fund investment cannot be ascertained beforehand.

To decide on which option is better for you, list down your goals, whether short-term or long-term, and opt for an appropriate avenue. It is advisable to explore your investment options with the help of a financial expert who can suggest tailormade financial plans while considering your risk tolerance, investment horizon and financial goals.

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