Fixed Deposits or Mutual Funds - Where to invest?

For most of the investors in India, Fixed deposits (FDs) are the most preferable options when it comes to saving money. One of the major reasons behind this belief is that FDs are one of the oldest saving instruments and are considered to be the safest because they offer a fixed rate of return.
In today’s times, is it still the most preferred investment option? Do you still get the best returns from a fixed deposit? Or should you invest in other instruments like Mutual Funds? They involve market risks but can offer greater returns and help you achieve your future goals, like marriage, education, home, etc.

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Do not worry let's understand both the investment options and decide for yourself if you should opt for fixed deposits or Mutual Funds or both.

Fixed Deposits or Mutual Funds

Fixed Deposits are termed as FDs in short form. Banks provide both short-term and long-term saving instruments. The Government of India decides and fixes the FD rate of interest; hence the growing inflation doesn’t impact the returns on FDs. Notably, the returns on FDs are taxable for the investors but the FD investments are fit for tax deductions u/s 80C of the IT Act.

On the contrary, Mutual Funds are market-based investment instruments that do not assure a fixed rate of return. Nevertheless, in long run, mutual fund investors have gained a return of 10-15% return, which quite higher in comparison to Fixed Deposits. You can select from different types of Mutual Funds – Debt, Equity, Hybrid, Balanced funds, etc.

Debt Mutual Funds are low risk in comparison to equity funds but the returns are also less. The capital is invested in fixed-income investments like government bonds, securities, and corporate bonds, and the remaining in equity markets. On the other hand, Equity Mutual Funds are riskier and can offer higher returns. Capital investment is majorly done in the equity market and lesser in government bonds, securities, and corporate bonds. However, Balanced Mutual Funds partially invest in both Equity and Debt Funds.

Difference between Fixed Deposits and Mutual Funds

For many, it is still a debatable question of whether to keep investing in fixed deposits or start investing in Mutual Funds. Here is a brief comparison of FD vs. Mutual Funds on certain parameters that will help you make an informed decision.

Investment Returns

Bank Fixed deposits provide assured returns that are pre-decided. The returns vary from one bank to another for the money invested as per the opted FD tenure. It implies that if you invest a certain sum in a Bank FD for six months the FD rate of interest would be different than if you opt for a 5-year FD. Upon maturity, you will receive the same rate of interest as decided at the time of investment.

Coming to mutual funds, there are no fixed returns as it depends on the market conditions. But this does not mean that the returns will be negative, in the long run, mutual fund investment can offer inflation beating returns that are much higher in comparison to the FD returns.

Rate of Return

The FD interest rate is fixed based on the type and tenure of the FD. Hence, they are not expected to give a higher rate of interest. On the other hand, the rate of return on Mutual Funds depends on the fund type and market volatility. You can get higher returns when the market goes high and vice-a-versa.

So, if you make a short-term investment in debt funds for one to three years then you can expect a 6-9% rate of return.  And FD for the same duration can be 6-9 percent, and the Bank FD interest rate would also be around 6-8 percent. For example, Axis bank FD rates for 1-year is around 5%. But if you want to avail good returns on 1-year of investment then liquid funds would be preferable. And there is no lock-in period if you invest in liquid funds and there is no penalty like FDs on an early withdrawal.

Impact of Inflation

Inflation does not affect FD returns as the rate of interest is pre-decided. The returns that you get on Mutual Fund are inflation-adjusted which enhances their possibility of generating better returns.

Risk Factors

The safest option with no risks and pre-determined returns is a Fixed Deposit. The risk involved in mutual funds is higher but the income generated can be much higher, which makes the risk worth it. But for those who do not want to take any risk, FDs are a suitable option. Equity Mutual Funds offer higher returns by investing in stock markets and the risk is also very high. If you want to invest in mutual funds and do not want to risk it much, then you can look at debt mutual funds.


Fixed Deposits do not provide liquidity as the money invested remains locked for a fixed tenure. And if you withdraw your FD before the maturity, the bank charges a penalty to the investor.  On the other hand, mutual funds have higher liquidity and you can redeem the amount anytime.


The interest that you earn from a fixed deposit it’s taxable as your tax slab. In mutual funds taxation depends on the holding period. Short-term and long-term capital gains are taxed differently.

Tax Savings Fixed Deposits vs. Mutual Funds

If you are investing in a 5-year FD to avail tax-benefits u/s 80C, alternatively you would also like to invest in ELSS mutual funds or Equity Linked Savings Scheme. ELSS offers good returns historically and also has the lowest lock-in period of 3-years only.

Which is better, FD or Mutual Fund?

The decision to invest in a bank FD or a mutual fund would vary as per your risk-taking capacity and the surplus amount that you can invest. You would need to deposit a lump sum amount in an FD whereas in Mutual Funds you can start your investment with a minimum of Rs. 500 per month. However, it makes sense to invest in Mutual Funds for the long-term and earn higher returns to achieve your future goals.


Depending on the purpose of your investment, and future goals you can invest either in fixed deposits or mutual funds. A lot of people who invest in both MF and FDs can balance returns on their investments.

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