Mutual Funds vs. Bank FDs: Which is better?

Mutual Funds vs. Bank FDs

Best Investment Options

Both mutual funds and fixed deposits are considered one of the best investment options. But, when it comes to investing money, people opt for fixed deposits as they are considered to be safer than mutual funds. Fixed Deposits offer a fixed return over a specified period of time. But, with tax payable at the current tax slab, an investor will end up paying higher taxes with higher investment value. Also, if we take the rate of inflation over the years, it might be possible that an investor may actually be facing a loss by investing in a fixed deposit.

Although mutual funds are affected by market fluctuations and do have a level of risk. But, mutual fund investments are managed by professional fund managers (Regular investments), who do their best not only to keep the investments secure but also to grow it. When it comes to the returns these investment options provide, FD rates are fixed and do not change for the entire tenure. On the other hand, mutual fund rates are affected by market fluctuations. Mutual fund investments have the potential to earn higher returns during positive market conditions whereas fixed deposit returns remain unaffected.

Not only these, there are several other differences between a mutual fund investment and fixed deposit. Let’s check the difference between mutual funds and FDs to stay aware of the better investment option.

Comparison: Mutual funds vs. Fixed Deposits

FactorsMutual FundsFixed Deposits
Rate of ReturnsNo Assured ReturnsFixed Returns
Inflation Adjusted ReturnsPotential for High Inflation-adjusted ReturnsUsually Low Inflation-adjusted Returns
RiskMedium to High RiskLow Risk
LiquidityHigh liquidityMedium to Low Liquidity
Premature WithdrawalAllowed with Nominal Exit LoadAllowed with Premature Penalty
Tax Implication*Equity: Tax free for LTCG Rs. 1 lakhTaxable for interest income of more than Rs. 10000

(*Taxation implications are as per existing tax laws – FY2018. For Debt Mutual Fund Investments refer the tax implications mentioned below in this article)

Also Read: Things to know when Investing in Mutual Funds

Difference between Mutual Funds and Fixed Deposits

Risk-Return: It is essential for every investor to know that mutual fund scheme is a higher risk investment option than a bank fixed deposit. Fixed deposit provides pre-specified fixed returns for the entire tenure, whereas on the other hand mutual funds provide returns depending on the market fluctuations. As mutual fund schemes are of the market-linked nature, the potential return depends on the market conditions and how capable the fund manager manages the portfolio. Usually, mutual fund investments provide higher returns than fixed deposits during positive market conditions. So, any investor should opt for a mutual fund to earn a higher rate of return on the investments. Moreover, investor can use a mutual fund calculator available online to calculate the returns on several mutual fund schemes.

Real rate of return: Investing the money in equity oriented mutual funds over the long tenure helps to beat the market inflation and provide optimum returns to the investor. This means investing in a mutual fund can help to provide inflation-adjusted returns. But investing the funds in the best mutual fund schemes is a precarious task. On the other hand, a fixed deposit can earn a pre-defined rate of interest over the specified period of time. But, the return on the fixed deposit will not take into consideration any market inflation. This way, investing in mutual funds can prove to be beneficial than a fixed deposit.

Liquidity: Mutual funds come always with high liquidity; but, of course, it depends on conditions such as the type of the scheme opted for or the lock-in period or exit load of any specific scheme, etc. On the other hand, if we take the case of bank FD, liquidity is low during the whole FD tenure. An investor can opt to withdraw his / her fixed deposit by paying the premature penalty. But, this would cost the investor to lose out a portion of the expected return. Thus bank FDs offer medium-to-low liquidity. So, for high liquidity investments, it is always recommended to keep an eye on the best mutual funds available in the market.

Tax implication: Tax is one of the most important factors while choosing an investment option between mutual funds and fixed deposits. In the case of mutual fund investments, the tax implication depends on the category of mutual fund – equity or debt. Equity-oriented mutual fund schemes if held for the long-term (as per Income Tax Act over 12 months), then Long Term Capital Gains (LTCG) are taxable @ 10%. Long Term Capital Gains are only taxable if the gains exceed Rs. 1 lakhs. On the other hand, equity mutual fund schemes if held for short tenure (that is as per Income Tax Act 12 months or less) then Short Term Capital Gain (STCG) tax is levied @ 15%.

If the investor considers investing the funds in debt mutual fund schemes, then the Long Term Capital Gains (i.e. more than 36 months) is taxable @ 20% with indexation (optional in case of NRIs) and 10% without indexation (mandatory for residents). Indexation is a method of factoring in the rise in inflation between the year when the debt fund units were bought and the year when they are sold. Short Term Capital Gain in case of debt mutual funds (less than or equal to 36 months) is taxable as per the income tax slab of the investor.

In the case of bank FDs, the interest is taxable as per the tax slab (i.e. as per the marginal rate of taxation) irrespective of the tenure of the bank FD. Tax is deducted on interest income earned above Rs. 10,000 per financial year. Also, the tax is deducted at source (TDS) on fixed deposit by the bank, which can be claimed as a refund. So, fixed deposits do not consider inflation and then increases the tax liability with the increase in fixed deposit amount. Thus comparatively, investing in mutual funds is more tax efficient than bank FDs.

Flexibility: Investing in mutual fund schemes provide flexibility to the investor as well. Any investor can opt to invest their hard earned money in mutual funds using either lump sum investment or SIP investments. If the investor has a corpus of funds, then he / she can opt to invest in lump sum mutual fund investments. If the investor wants to invest a small amount in every fixed interval say a month then the investor can opt for SIP mutual fund investments. With SIP the investor gets the flexibility to invest a small amount every month and earn higher returns as well.

On the other hand, an investor can only invest a lump sum amount into a fixed deposit. So, mutual fund investments are more flexible than the fixed deposits which are offered by several banks and financial institutions.

You May also Like: When to Exit a Mutual Fund


Investors should consider investing their hard earned money in mutual funds as it can help them earn higher returns than any other form of investments like fixed deposits. But, it is vital for an investor to choose the category of mutual fund schemes (equity and/or debt), risk profile, investment tenure and the financial goals that the investor want to achieve.

About Sashi 562 Articles
Sashi Singh is content contributor and editor at IP. She has an amazing experience in content marketing from last many years. Read her contribution and leave comment.


    • If you have extra funds that you want to invest without involving any risk and earning high returns, then you should consider opening a high interest fixed deposit.

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