FD vs Mutual Fund – Where to Invest?

FD vs Mutual Fund – Where to Invest?

We are told by our parents, grandparents and neighbours that Bank Fixed Deposits are the safest place to invest your money. According to them, you should invest all your money in FD’s without thinking about anything else. So another question arises is there any better option than Fixed Deposit.

One common substitute that comes to our mind is Mutual Funds. Is Mutual Fund better than FD? for that we need to compare these investments on 5 parameters such as their Differences, Risks, Returns, Taxation and Tax Benefits and then we will be able to conclude whether FD vs Mutual Fund which is right for you

1) Differences Between Fixed Deposit and Mutual Fund

Fixed Deposit (FD) is a financial instrument provided by banks or NBFCs which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account.

Mutual Funds in Simple Term can be understood as a pool of money, where many people come together and Invest a Certain Amount of money, the Money is then Collectively Invested and Profit made is distributed Among its Investors.

2) Risks of FD vs Mutual Fund

Generally, Fixed Deposits are risk-free by the primary nature of the investment. Fixed Deposits come with a maturity period and can be redeemed or reinvested when its maturity expires. As of today Deposits up to Rs.1,00,000 are secured by DICGC (Deposit Insurance and Credit Corporation)

Mutual Funds are market-linked products and can be risky, but due to their diversification benefit, it makes them less risky than direct equity investing. There is no cover guaranteed when you invest in mutual funds.

3) Returns of Fixed Deposit and Mutual Fund

FD vs Mutual Fund - FD Interest Rates

Source – BankBazzar

As we can see returns in Fixed Deposits range from 4.50% to 6.30% depending upon its time period. Fixed Deposits returns fluctuate as when RBI changes interest rates. Interest can be paid monthly, quarterly, semi-annually or annually & you have the option to receive interest in your Bank Account or reinvest in the Fixed Deposit. Senior Citizens normally received 0.50% additional interest over and above the actual interest rate.

Average Returns of Various Types of Mutual Funds for Last 5 Years are as follows –

  • Large Cap Funds – 9.86%
  • Mid Cap Funds – 13.47%
  • Small-Cap Funds – 7.66%

Source – Value Research Online

4) Taxation of Fixed Deposit and Mutual Fund

Interest Received from Fixed Deposits is taxed as per your tax slab. For Ex If your income (including interest income) is below Rs.2.5 Lakhs, No tax is to be paid. Similarly when income exceeds 2.5 Lakhs but below 5 Lakhs then 5% Tax, Income above Rs.5 Lakhs but below Rs.10 Laksh are taxed at 20% and income above Rs.10 Lakhs are taxed at 30%. Additional Cess and Surcharge are levied on your tax amount.

Mutual Fund Taxation depends upon two factors such as holding period and type of mutual fund in which you have invested. You can read in-depth about mutual taxation by Clicking Here.

5) Tax Benefits (FD vs Mutual Fund)

You can save tax by investing in Tax Saving Fixed Deposits and avail up to Rs.1,50,000 Deduction from Total Income under Section 80C of the Income Tax Act’1961. Tax Saving FD’s come with a lock period of 5 Years and cannot be withdrawn before the end of 5 years.

Similarly, you can save tax by investing up to Rs.1,50,000 Deduction from Total Income under Section 80C of the Income Tax Act’1961 by investing in ELSS (Equity Linked Saving Scheme). ELSS has a lock-in period of 3 Years and cannot be withdrawn before the end of 3 years.


Now that we have seen the differences between FD and Mutual Fund, now it is important to decide which is best for you and where should you invest?

Who Should Invest in Fixed Deposits?

As we saw FD’s are very secure, people who want a risk free returns should invest in Fixed Deposits. Normally people who are retired and want social security with capital protection should invest in Fixed Deposits.

Also for people who are in lower tax brackets and have next to no tax to pay should invest in Fixed Deposits for better tax-free returns.

Who Should Invest in Mutual Funds?

People who are willing to take more risk for better returns should invest in Mutual Funds. Young People who want to invest money for goals such as Child’s Education, New House Purchase, Family Vacation etc.

Investors who are willing to invest for the long term and want better returns than FD’s should definitely invest in mutual funds.

So Where will you Invest Fixed Deposits or Mutual Funds ???

If you have any questions relating to the topic do let us know in the comments section below and we will make sure to reply.

1 thought on “FD vs Mutual Fund – Where to Invest?”

  1. Hi my loved one! I want to say that this post is amazing, nice written and include almost all significant infos. I?¦d like to see extra posts like this .

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