Mutual Funds vs. FDs: Know the Difference

Written by on February 2, 2020 in Investing and Insurance with 0 Comments

Interest rates in India have been coming down drastically over the last few years. This is the reason why the lucrativeness of fixed deposits, one of the best and most sought-after investments has reduced. Mutual funds have on the other hand seen massive inflows in the last few years mainly owing to the potential of providing better returns than fixed deposits over a longer-term horizon.

Both avenues of investment come with its pros and cons and therefore it is always advisable to have an understanding before placing a bet in any of them. Therefore, in this article, we will discuss the differences between the two based on various parameters.

1. Investment Risk

We all know that mutual fund investments are volatile in nature and majorly dependent on the ups and downs in the markets. So the risk in case of such investments ranges from moderate to high basis the category of investment.

However, in the case of fixed deposits that is not the case. They come with predetermined rates of return and are placed for a fixed term and are backed by a guarantee. Therefore, investors need not be worried about the volatility of markets in case of such investments.

2. Returns

Historically mutual funds have provided much better returns than generated by fixed deposits. If you see the historical rates, the rate of interest in the case of fixed deposits has come from double digits to low single-digit. Currently, it is in the range of 6%-6.5%.

When it comes to equity mutual funds, the returns have been much more than that, mostly in the range of 12%-18% basis the category of investment. Also for debt funds, the returns range from 7%-9%. Therefore, negating the short term volatility in question, mutual funds provide better than fixed deposits.

3. Taxability

Interest earned on fixed deposits is taxable as per the income tax slabs that the investor falls into. If the interest earned in a particular year is more than Rs. 10000, then TDS is deducted @10% on such investment.

In the case of mutual funds, taxation varies as per the types of mutual funds. For classification purposes, mutual funds are divided as per long term capital gains vs. short term capital gains.

Equity Mutual Funds: STCG is for a period of less than 12 months. Taxability is 15% for STCG.

LTCG for equity mutual funds is for a period of 12 months or more. Taxability is @ 10% for income over Rs. 1 lakh.

Debt Mutual Funds: STCG is for a period of fewer than 36 months. Taxability is as per the income tax slab of the investor.

LTCG is for a period of 36 months or more and taxability is calculated by taking into account the benefit of indexation. Therefore, for long periods of time debt funds can be considered almost tax-free.

4. Liquidity

When it comes to liquidity, fixed deposits are not considered as a good option as the amount that is invested is locked for a certain period of time. If the depositor wants to withdraw the FD before maturity,  a penalty is charged by the bank on the interest accrued. Mutual funds, on the other hand, have higher liquidity as one can opt to sell the funds even within a shorter span of time without affecting the fund value up to an extent.

5. Expense ratio and exit load

For the purpose of managing the fund and other expenses in relation to transactions, advertisements, etc., mutual funds deduct a part of the investment known as the expense ratio. The expense ratio is high in case of equity funds whereas it is low in case of debt funds. Also for withdrawal of the investment before any particular date, mutual funds deduct some amount as exit load (For equity mutual funds, it is mostly in the range of 1% if withdrawn before 12 months).

In the case of fixed deposits, there is no concept of expense ratio. You can calculate the maturity amount and interest rates using an FD calculator available online. However, some fixed deposits deduct some amount as charges for premature withdrawal of the investment.

Therefore, investors must be aware of these deductions before making any investment.

Benefits of Investing in Mutual Funds

  • The risk factor is lowered through diversified investment
  • The minimum investment needed is just Rs. 100 or Rs. 500
  • Offers high returns in investments especially from equity-based mutual funds
  • The best thing is, funds will be managed by highly experienced professional experts on your behalf
  • The investor gets to choose from a wide choice of investments, viz. Systematic Transfer Plan, Systematic Investment plan, Lumpsum

Benefits of Investing in Fixed Deposits

  • Zero risks involved as the investments made are secure in a system which is government-backed
  • Guaranteed returns assured
  • Tax deductions of up to 1,50,000 as per Sec 80C of the Income Tax Act, 1961 for an FD spanning over 5 years of tenure
  • Interest earned by senior citizens on FDs of up to Rs. 50000 are tax-exempt under Section 80 TTB of the Income Tax Act, 1961


In relation to the points discussed above, investors with higher risk appetite and long term horizon can opt for mutual funds whereas someone looking at very low-risk investments can opt for debt mutual funds/ fixed deposits. However, in the long run, debt mutual funds provide better tax-adjusted returns than fixed deposits. It’s totally the investors call to go with whatever investment they find best suited to their needs.

Happy Investing!

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