FD Vs Mutual Fund – View this Guide Before Making an Investment

When choosing an investment instrument, factors such as risk appetite, investment horizon, long-term and short-term goals play a significant role. Fixed deposits and mutual funds have become one of the most popular asset classes to build wealth over time. Here is a guide that presents a detailed study of these two modes of investment.

FD Vs Mutual Fund - View this Guide Before Making an Investment

What are Fixed Deposits?

A fixed deposit provides the means for individuals to set aside a lump sum of money and earn a fixed interest on their principal investment. However, the interest rate on fixed deposits differs across financial institutions. Fixed deposits also come with a maturity date and withdrawing funds from the fixed deposit before maturity can lead to a penalty.

What are Mutual Funds?

Mutual funds are a type of investment in which an Asset Management Company (AMC) or a fund house pools investments from individuals and institutional investors. As the investment corpus grows, the gains are distributed to the mutual fund investors in the proportion of their investment. Mutual funds are an excellent way to form well-diversified portfolios. Equity Mutual funds fundamentally invest capital into stocks. Debt mutual funds on the other hand invest in bonds and money market instruments.

FD vs Mutual Funds

Let us examine the primary differences between fixed deposits and mutual funds:

Characteristics Fixed Deposits Mutual Funds
Returns The interest rate on FD is constant. As a result, fixed deposits offer stable returns. Mutual funds offer variable returns. The returns are determined by how well the holdings in the fund have performed.
Risk Since fixed deposits are not dependent on stock market conditions, they carry low to minimal risk. The returns in the case of mutual funds are tied to stock market conditions and carry a higher risk. It is important to understand the risk associated with the specific mutual funds before investing in them.
Growth The principal amount is unchanged throughout the investment period in the case of fixed deposits. While investing in mutual funds, if the value of your mutual fund appreciates over a period of time, your principal amount also continues to grow. Individuals seeking to invest in equity mutual funds may experience a more considerable growth in their principal amount when the market is on an uptrend compared to fixed deposits.
Lock-in period There is usually a lock-in period tied to fixed deposits. You may decide on the lock-in tenure. The tenure for fixed deposits may range from 7 days to 10 years. There is usually no lock-in period attached to investments made in mutual funds. Investors are allowed to withdraw their investment as per their discretion and requirements.
Liquidity Fixed deposits carry moderate liquidity since there, you may have to pay penalties in case of premature withdrawals. Open-ended mutual funds can be highly liquid. However, you may have to pay a certain amount of exit load while making a withdrawal within a specific timeframe from the date of investment.
Expenses No expenses are charged during the tenure of the fixed deposit. You may have to pay a nominal fee associated with managing the funds.
Dividends You are not eligible to receive dividends when investing in fixed deposits. You may be entitled to receive dividends. The exact nature of dividends would depend on your mutual fund scheme.
Investment Options You may invest only a lump sum amount as a fixed deposit. Individuals willing to part away with a certain percentage of their income regularly can invest in mutual funds. Mutual funds allow SIP investment plans under which investors can deposit a specific amount in the scheme periodically. Individuals also have the flexibility to begin their investments in mutual funds with small amounts.
Offered by Fixed deposits are typically offered by banks and financial institutions. Fund houses and asset management companies primarily offer mutual funds.
Regulated by RBI (Reserve Bank of India) SEBI (Securities and Exchange Board of India) and Association of Mutual Funds in India (AMFI)
Taxation You may be required to pay taxes in line with your respective tax slab. Fixed deposits mandate a 10% TDS on the interest earned in excess of Rs. 10,000 during a financial year. You can also enroll into tax-saving fixed deposits to claim tax benefits under section 80C by locking in a maximum investment of Rs. 1.5 lakh per annum for five years. With mutual funds, you must pay a short-term capital gains tax levied at a flat rate of 15%. In addition, investors are charged a long-term capital gains tax of 10% on earnings that exceed Rs. 1 Lakh in the case of equity. For debt mutual funds, the long-term capital gains tax of 20% is charged after indexation.
Who should invest? ●       Risk-averse investors who are not willing to take market risks and looking for stable returns.

●       Individuals with taxable income.

●       A retired individual looking for a regular source of income.

●       Investors willing to take risks to increase the chances of making profits.

●       Investors looking to diversify their portfolios.

●       Investors seeking higher returns than traditional sources of investment.


Both fixed deposits and mutual funds offer excellent benefits to investors. It is imperative that individuals carefully understand the two investment vehicles before making a decision. Individuals looking at lower risk for their investments may opt for fixed deposits. However, young investors willing to take greater risks to earn more profits and generate higher returns or individuals having a more significant disposable income may select to invest in mutual funds. Before making an investment decision, you must thoroughly understand the terms and risks associated with the investment vehicle.