Fixed Deposits Vs Mutual Funds – A Comparative Analysis

Elders and money experts always recommend investing your money as soon as you start earning. And when it comes to investment, the debate between fixed deposit and mutual find starts. Even though Indians trust fixed deposits over other investments, but those who have a high-risk appetite as well prefer other investment options like mutual funds.

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The tendency to invest in fixed deposits start in the year 2008 when the market was down because of the global recession, and people were searching to have a safer place of investment. Resultantly, an all-time highest value of 29.3% was recorded in 2008 only. Since then, it has maintained steady popularity.

On the other hand, when the recovery of the economy started in the year 2009, Mutual Funds started seeing growth. Now let us do a comparative analysis of mutual funds and fixed deposits under certain parameters:


  • Fixed Deposit: A fixed deposit scheme is an investment that is not linked to the market wherein you invest your money for a fixed predetermined time and get interested at an agreed rate. However, to get full interest, you must keep your money in the FD scheme for the predefined period.
  • Mutual Funds: Mutual funds are a bag full of stocks of various bonds, companies, government debentures, and corporates, and some other types of securities. Under mutual funds, the principal sum of investors is collected and it is channeled towards different kinds of security instruments. Mutual funds are liquid. Therefore, the investors are allowed to withdraw their money from it at any time.


  • Fixed Deposit: There are two types of fixed deposit schemes available:
    • Cumulative FD: Under this type of fixed deposit, the interest that your FD amount earns is periodically reinvested in the account. The interest earned is compounded.
    • Non-Cumulative FD: By investing in this type of fixed deposit, you can get periodic pay-outs of the interest.

Besides these two kinds of fixed deposits, there are FDs for senior citizens and tax-saving FDs are also provided.

Mutual Funds:

There are three types of mutual funds available:

  • Equity Mutual Funds: The major share under these mutual funds is invested in stocks.
  • Debt Mutual Funds: These are fixed income mutual funds. The common examples of this type of mutual fund are – bonds and debentures.
  • Hybrid Mutual Funds: The investment instruments that are invested in both fixed income and stocks are known as hybrid mutual funds.

You can come across some other types of mutual funds as well, such as index funds or fund – of – funds.


The returns under fixed deposits and mutual funds are as follows:

  • Fixed Deposit: When you start investing in a fixed deposit scheme, you will start knowing that what will you earn when the tenure ends. However, financial institutes revise the interest rates on which they were offering the FD previously. This change in interest rates of FD depends on many factors like the repo rate, which presently is 4%. However, this does not affect your income if you have locked your investment previously at a certain rate. Currently, the best FD interest rates offered by Banks range from 2% to 5%.
  • Mutual Funds: When we talk about mutual funds, the rate of return depends on the fluctuation of the market and how well your underlying assets are performing. Therefore, the certainty of the mutual fund returns is lower and as an investor, you may assume different levels of risk as per the asset allocation. For instance, in the current time of crisis, if we check the performance of mutual funds, we will get to know that the return offered by the mutual fund in the tenure of five years is 10%.


Under this, the following conditions are considered:

  • Fixed Deposits: The interest earned through FD attracts TDS, when:
    • The interest earned is more than Rs. 40,000 (for general public).
    • The interest earned is more than Rs. 50,000 (for senior citizens).

The interest that you earn from FD is added to your total income and then it is taxed as per your salary slab.

  • Mutual Funds:
    • For equity-based funds, the taxation is done in this way:
      • 15% STCG, if you hold the units of mutual fund for not more than 12 months.
      • 10% LTCG without offering the index benefits, if you keep holding your mutual fund units one year and your income tax returns are more than Rs. 1 lack.
    • The taxation is as follows for debt-based funds:
      • 20% of the LTCG with the benefit of indexation, when the holding period of more than 36 months.
      • The income tax returns are taxed as per the rate of the slab if you hold the units for less than 36 months.

Steps to Invest:

  • Fixed Deposits: For investing in a fixed deposit account, you need to approach a bank or NBFC. There you have to deposit a lump-sum amount. This amount is locked for a pre-selected period.
  • Mutual Funds: There are two methods to invest in a mutual fund scheme:
    • SIP
    • Lump-Sum
You may like to Read: Union Bank of India FD Rates

The Bottom Line:

You can consider the above mentioned comparative analysis and select an investment option as per your choice as both have their pros and cons.

Written By: PolicyBazaar - Updated: 09 August 2021

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