Fixed Deposit vs Mutual Fund : Everything You Should Know


Fincrif India

Sep 27

05:18 AM

Depending on an individual's income, monthly costs, and financial objectives, the optimal plan will be determined. It is critical to comprehend your objectives and the characteristics of both investment products before determining where and how to invest.

Investors frequently ponder which is the superior investment choice in India while picking between mutual funds and fixed deposits. Due to the guaranteed interest and principal at maturity, FDs are the safest form of investment. To protect depositors' funds, the Reserve Bank of India controls banks through enforcing responsible lending standards. The Unit Trust of India established mutual funds in India in 1963, but they have a long history there. Despite this, mutual funds have only recently become more popular with regular investors—just within the last 20 to 25 years. Fixed deposits have historically been preferred because of their perceived stability and minimal risk, but as investors look for better returns and diversified portfolios, mutual funds have grown in popularity.

What is a Fixed Deposit ? 

Customers in India have the opportunity to invest in fixed deposits through banks, post offices, and a few deposit-taking non-banking financial firms (NBFCs-D). Banks and other financial organisations provide attractive interest rates for these deposits, and the length of the deposit can be anywhere from seven days to ten years. Over time, FDs have evolved into a versatile and adaptable financial product that offers a variety of benefits to investors.

What is a Mutual Fund ? 

Investing products offered by fund houses include mutual funds. It creates a single portfolio out of the best-performing stocks and bonds across different industries. According to the fund category, the fund manager chooses the right amount of equity and debt exposure. As a result, a portfolio with a diverse mix of equity and debt in various industrial sectors is created. This portfolio offers a respectable return that is higher than that of FDs while carrying a lower risk than the stock market. The expense ratio is the cost the fund management charges for building and managing the portfolio, that is, for the purchase, sale, or holding of different assets.

Why Should You Choose Fixed Deposit ?

  • FDs could be a useful option for risk-averse investors who favour low-risk investments with guaranteed returns. It is also favoured by investors who don't want to continuously monitor the performance of their investments.

  • Many banks offer competitive interest rates for senior citizens who are looking for safe investment options with better returns, therefore they may be interested in FDs.

  • Longer-term investors can choose from a variety of FD tenures. As a result, it can be appropriate for achieving your short-term financial objectives.

  • Tax-saving FDs qualify for deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, making them a viable option for taxpayers wishing to lower their income tax obligations.

Indian investors have long favoured fixed deposits (FDs). As a result, people choose it without hesitation. However, recent infractions of the RBI's rules have taken place, placing depositors in challenging circumstances. Such instances may result in withdrawal restrictions, a suspension of withdrawals, or a permanent ban on withdrawals, depending on the circumstances. FDs continue to be largely safe and provide guaranteed returns notwithstanding a handful of these negative events.

Why Should You Choose a Mutual Fund ? 

  • If you are relatively more risk-tolerant, mutual funds might be a better choice. It provides better returns and more advantageous taxation. Unlike FDs, which are taxed while the interest accrues, mutual funds only require payment of tax when selling or redeeming units at a profit. Mutual funds can also assist in reducing inflation.

  • For individuals looking for returns above those offered by bank savings, mutual funds can be a decent option. However, it's critical to have a long enough investing horizon and be prepared to accept some value fluctuation.

  • Because they invest in a variety of stocks, bonds, and other assets, mutual funds can be a beneficial option to diversify your investing portfolio.

  • Mutual funds may be appealing if you are looking to invest for the long term because they have a history of providing returns that outpace those of bank savings.

  • You can simultaneously accrue wealth and gain tax advantages by investing up to Rs 1.5 lakh annually in an equity-linked savings system (ELSS), a sort of tax-saving mutual fund.

Consider the following scenario: You opt to invest Rs. 1.5 lakhs in ELSS with your taxable income for the year being Rs. 10 lakhs. Your taxable income will be lowered to Rs. 8.5 lakhs in this situation (Rs. 10 lakhs - Rs. 1.5 lakhs), and you will be taxed in accordance with the lower amount. The amount of tax you can avoid paying is Rs. 30,000 (20% of Rs. 1.5 lakhs), if you fall into the 20% tax rate.

In addition, ELSS may provide larger returns than other tax-saving investing options like the Public Provident Fund (PPF) or National Savings Certificate (NSC). ELSS has traditionally outperformed over the long term thanks to its equity-based investment approach, albeit profits are not guaranteed.

The ELSS's 3-year lock-in term provides an additional benefit. In contrast to instruments like PPF and NSC, it encourages saving habits while also being more flexible.

Some investors are put off by the inherent volatility of mutual funds, but this is typical for assets that are connected to the market. Although the risk-return profile differs from one instrument to another, not all mutual funds are equally volatile. 

Investors may benefit from starting with less risky mutual funds and progressively moving to riskier ones to become accustomed to the volatility. The secret to investing in mutual funds is developing a tolerance for volatility.


Depending on an individual's income, monthly costs, and financial objectives, the optimal plan will be determined. It is critical to comprehend your objectives and the characteristics of both investment products before determining where and how to invest. 

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