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Mutual Fund vs Fixed Deposit - Where Should You Invest?

Batman vs. Iron Man.

That’s the closest comparison we could think of for mutual funds vs. fixed deposits (in no particular order – we’re not trying to start a war here! 😇). But the point is this – comparing the two (mutual funds and fixed deposits) is like comparing two superheroes and trying to determine which one is your favorite. Both have their strengths and weaknesses and ultimately which one you pick is a personal choice.

However, it helps to know the various parameters that separate the two so that you can make an informed decision.

And that’s where this blog steps in.

We’ve put together a list of seven parameters that can influence the mutual fund vs. fixed deposit match-up. This detailed comparison between investing in mutual funds and investing in fixed deposits can shed some light on which option is better suited for you –

Nature of the Investment

  • Mutual Funds – Mutual funds are investment tools that pool money from multiple investors to enable your investments in a diversified portfolio of securities, such as stocks, bonds, or both. Mutual funds are managed by professional fund managers who make investment decisions based on the fund’s objectives and strategies.
  • Fixed Deposit – Fixed Deposits (FDs), also known as term deposits, are investment instruments offered by banks or financial institutions. In opting for FDs, you are required to deposit a specific amount of money, for a fixed period at a predetermined interest rate offered by your bank. The rate of interest at which you get the FD is the rate of interest throughout your tenure, and both, the principal amount and interest are repaid at maturity.


  • Mutual Funds – Mutual funds are susceptible to market volatility. The returns generated by mutual funds can be variable, and investors may experience both capital gains and losses. Mutual funds can be classified as low-risk, medium-risk, and high-risk, and investing in mutual funds depends largely on your individual risk appetite. Important Disclaimer: No-risk investing is not a thing!
  • Fixed Deposit – Fixed deposits are usually considered low-risk investments since they provide a fixed interest rate over a specified period of your choosing. The returns from Fixed Deposits are more or less predictable and guaranteed, ensuring the safety of the principal amount. If you ask your parents, they’ll surely tell you that they’ve found FDs to be a safe investment option with minimal scope for loss. Investors are likely to be influenced if the bank in which they have created a Fixed Deposit itself displays poor financial performance.


  • Mutual Funds – The returns on mutual fund investments depend wholly on the market conditions. You can get mutual funds that are offering as little as 5% interest, and also find options that are offering much higher returns (20%+). But higher returns can often mean a higher level of risk is associated with the fund – and this is what you as an investor need to verify before investing. It is also important to remember that ultimately the returns generated by mutual funds can be variable, and investors may experience both capital gains and losses – in equal measure!
  • Fixed Deposit – You can easily calculate your returns based on your fixed deposit interest rate. If you are investing ₹10,000 at an interest rate of 7% per annum, then in one year you will have earned ₹700, and will ultimately have ₹10,700 at the time of maturity. However, some banks offer fixed deposits on a compounding interest rate – which means your interest from one year gets added to the principal amount in the following year. So, enquiring about the structure of interest rates is important before making any decisions. Typically FDs offer interest rates between 4-8%, and there is only a very slim chance of incurring a loss.


  • Mutual Funds – Mutual funds are generally more liquid compared to fixed deposits. Investors can redeem their mutual fund units at any time, subject to the fund’s terms and conditions. It is important to remember that a number of mutual funds have a lock-in period – which means you will potentially incur charges (called ‘exit load’) for redeeming your funds before this period is up. Typically, the redemption process may take a few days, making mutual funds fairly liquid options.
  • Fixed Deposit – “Fixed” is in the name, folks! Fixed Deposits are made for a predetermined period of time, and breaking an FD before its maturity can result in you incurring some charges from your bank. For this reason, investors are usually committed to seeing their FDs all the way to maturity. It is also worth mentioning that some banks might, however, permit a partial withdrawal from a fixed deposit, or might even allow you to take a loan against your fixed deposits (where these FDs become the collateral you will offer your creditor). As such, fixed deposits are moderately liquid and subject to transactional losses.


  • Mutual Funds – One of the most significant features of mutual funds is their ability to help investors diversify their financial portfolio across various asset classes, sectors, and geographical regions. And as you already know – diversification helps reduce the risk associated with investing in one single security by mitigating potential losses (one investment goes down, but maybe another goes up!) across the board. Mutual funds allow investors to access a broad market portfolio even with a relatively small investment (like with SIPs!).
  • Fixed Deposit – Fixed Deposits do not offer investors any real scope for diversification since the entire investment is placed with a single bank or institution, at a fixed interest rate, and for a fixed period of time.

Investment Horizon

  • Mutual Funds – Mutual funds are suitable for long-term investments as they provide an opportunity to benefit from the power of compounding. Since mutual funds invest in the market, short-term fluctuations may occur, but over the long run, they have the potential to deliver higher returns.
  • Fixed Deposit – Fixed Deposits are typically short to medium-term investments, and a good way to save money to meet short-term goals. The investment period for FDs ranges from a few months to several years, depending entirely on your preference. Fixed Deposits are often favored by investors with a shorter investment horizon or those who are simply seeking stability and guaranteed returns in a fixed period of time. 

Tax Implications

  • Mutual Funds – In India, mutual funds are subject to capital gains tax based on the holding period and the type of fund you have invested in. Equity mutual funds held for over one year are subject to long-term capital gains tax, while debt mutual funds have different tax implications based on the holding period and the income tax slab of the investor. There are, however, Equity Linked Saving Schemes or ELSS mutual fund options – if you invest in these, then your invested amount (up to ₹1.5 lakhs) can get deducted from your taxable income (under Section 80C of the Income Tax Act of India).
  • Fixed Deposit – Fixed Deposit interest is taxable as per your applicable tax slab. The interest earned is added to your annual income and is taxed accordingly. However, some banks offer tax-saving Fixed Deposits that qualify for deductions.. These tax-saving FD accounts offer a tax deduction. A tax-saving FD account offers a tax deduction (under Section 80C of the Income Tax Act of India). Any investor can claim a deduction of a maximum of ₹1.5 lakhs per annum by investing in a tax-saving Fixed Deposit account.

Mutual Funds vs. Fixed Deposits is not really a battle with a clear winner (dare we say… much like Batman and Iron Man?!), because both have strong advantages working in their favor.

The key to selecting the best investment option for yourself is to identify your financial goals, and start diversifying as soon as you can! 🙂


What are Fixed Deposits?

Fixed Deposits (FDs), also known as term deposits, are investment instruments offered by banks or financial institutions where the investor is required to deposit a specific amount of money, for a fixed period, at a predetermined interest rate offered by the bank.

What are mutual funds?

Mutual funds are investment tools that pool money from multiple investors to enable your investments in a diversified portfolio of securities, such as stocks, bonds, or both

Do mutual funds have a higher liquidity or do fixed deposits?

While fixed deposits are generally considered less liquid than mutual funds, both options can allow for early withdrawals – but, the investor is liable to pay an exit load.

Do mutual funds offer higher returns than fixed deposits?

Fixed Deposits typically offer an interest rate of 4-8%, while the interest rate for mutual funds can go over 20% as well. However, mutual funds are susceptible to market ups and downs and therefore an investor can make huge gains or huge losses when the interest rate is high; whereas FDs are solely influenced by the bank.

Are there tax-saving mutual funds and fixed deposits?

Yes. You can find tax-saving benefits with both these investment options – wherein up to ₹1.5 lakhs can be deducted from your total taxable income, per year.

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