Fixed Deposits vs Mutual Funds: Which is better to Invest?

Published On: 19-Dec-2021

Mutual funds are increasingly becoming the preferred option for retail investors, thanks to the growing awareness of this most transparent and professional money manager. The consistent monthly SIP inflows is a reflection of investor’s changing preference towards mutual funds. The data released by the Association of Mutual Funds in India (AMFI) shows that investors channelised Rs. 10,351 crores in mutual funds through Systematic Investment Plans (SIPs) in September 2021 alone and Rs. 56,454 crores in aggregate in the first half of fiscal 2022 is a sign of steady growth in the numbers.

However, conservative investors seems to prefer and are attached to traditional investment options like fixed deposits, conventional deposits etc. Most of this segment of investors seems to be risk averse and are better off with the fixed returns that bank deposits give.

As an investment option, Fixed Deposits (FDs) and mutual funds may be starkly different. Still, given the wide range of mutual fund schemes available, the investors may find suitable mutual funds with similar risk profiles and are also of better returns potential.

Further, it would be more appropriate to compare FDs against debt funds alone, setting equity funds aside since equity is a different asset class altogether.

Here are the key considerations one may consider while choosing to invest in FDs or debt funds:


Fixed deposits are plain fixed-income instruments which are issued by various institutions, such as banks, corporates etc., In contrast, debt funds create a diversified investment portfolio of debt securities, including Govt. Securities (G-Secs), Commercial Paper (CP), Treasury Bills (T-Bills), Certificates of Deposit (CD), Corporate bonds, Floating-rate bonds, etc.

As such, debt funds endeavour to mitigate the concentration risk for the investor to an extent possible. In the case of FDs, the entire amount deposited with a single bank is lost, if the bank fails (subject to Rs. 5 lakh deposit insurance cover, if available). However, in the case of debt funds, the loss may be limited since the defaulted security may only be occupying a small share of the overall investment portfolio.

The convenience of Investing

While traditional investors find many conveniences in investing in FDs, debt funds are equally convenient to start an investment. Investors can invest in a debt fund through the website/ mobile app of the mutual fund or deposit application forms at any of the Official Points of Acceptance.

Further, the investment in debt funds is held under physical mode or in the Demat account. Thus, it is more convenient to store records and references as against FDs, which are generally physical records.


Investors prefer fixed deposits for the fixed returns. In contrast, debt funds invest in securities which are traded, therefore are market linked. However, considering the wide range of investment options and professional fund management, debt funds offer the investors the potential of better returns.

Further, the investors may also benefit from market interest rates and credit risk premium changes as the debt portfolio is valued daily at the market rates. 

Liquidity of the Investment

Fixed deposits are generally liquid but may be subject to premature withdrawal penalties and lower interest rates for the deposit tenor. As such, the overall returns for the investors may be lower than the initially contracted rate if the investor chooses to liquidate the deposits.

In contrast, the investors in debt funds may liquidate their investments at prevailing Net Asset Value (NAV) subject to exit load (if applicable) for redeeming before the specified period of exit structure. However, most of the debt funds have a minimum specified period for exit load levy.

Periodical payouts to the investor 

An investor may choose the periodical interest payout option offered by the banks while making the deposit. Such periodicity may be monthly or quarterly.

In contrast, the investor in mutual funds can choose to invest in the 'Payout of Income Distribution cum capital withdrawal' option (erstwhile called dividend option) for periodic payouts from the investment. Further, the investors can also manage the regular cash flows through a Systematic Withdrawal Plan (SWP), which automates the periodic redemption of mutual fund investments.

Tax Efficiency 

Interest from FDs and Short-Term Capital Gains (STCG) from debt funds are taxable at the regular tax rates. However, if the investors have held the debt fund units for more than 36 months, such gains are classified as Long-Term Capital Gains (LTCG) and taxed at 20% after indexation benefit.

Indexation increases the investment cost for the inflation prevailing over the period while calculating the taxable gains, thus effectively taxing only the actual returns (net of inflation).

Given the inherent benefits and tax efficiency coupled with a wide range of investment options, the investors should consider investing in debt funds for their investment needs.

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only and are updated as per the Union Budget 2021 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.