Fixed Deposit vs Mutual Fund : All you need to Know

(Last Updated On: May 7, 2017)

Fixed Deposit vs Mutual fund is a difficult comparison. We compare FD and Mutual Funds based on return, risk profile, investment horizon and other factors. Both of them are very different product and each has its own advantage and disadvantages.


Fixed Deposit (FD) are saving tools offered by banks to deposit lump sum amount for a fixed period of time on
higher interest rate than saving accounts. The interest rate offered on fixed deposits are compounded quarterly and is a risk-free saving instrument. The tenure of fixed deposit varies from 7 days to 10 years and interest rate offered is less for shorter duration and increases gradually for the longer duration.

Mutual funds are investment products which pool money from numerous small investor to create a fund which invests in equity and debt instruments of companies with promising future outlook for superior return in long term period. Mutual funds are the best alternative for those investors who don’t have much knowledge on stocks market or don’t have the time track the market. Investment in mutual funds are considered riskier than FD and returns are subject to market volatility. It brings professional management of funds


Risk profile

Fixed Deposit are risk-free saving instruments and is not affected by any macroeconomic event or RBI policy. There is no effect of a change in monetary policy by RBI on existing fixed deposits.

Mutual Funds carry risk on investment. Different fund type has different categories of risk. Like Equity funds contains higher risk than Balanced Funds and Balanced Funds are riskier than Debt funds. There are various risk factors in a Mutual fund, like:

  • Market Risk
  • Sectoral Risk
  • Interest Rate Risk
  • Company Risk
  • Fund Manager Risk
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Returns from fixed deposit are fixed. Interest rate of fixed deposit depends on the Repo rate, CRR, liquidity in the system. If the RBI decides to decrease Repo rate then all the new Fixed deposit that will be issued will have less interest rate. The increase in liquidity in the system also decrease the rates for FDs.

Returns from a well managed mutual fund outperform the fixed deposit return by a huge margin of 10-12 percentage points over the long term. Equity mutual fund return depends on market performance and portfolio performance of the fund. Debt mutual fund’s return depends on the Interest rate, interest income, and liquidity.

Investment Horizon

Fixed Deposit have maturity period of deposit ranging from 7 days to maximum of 10 years. Depositors choose their maturity period depending on their fund requirement and maximum interest rate being offered in which time slab.

Investment in mutual funds is suitable for the long term period of more than 5 years to 10 years. The longer time frame will help in the compounding of investment, factor in market volatility of price and better return. Those investors with an investment horizon of short-term duration can invest in short-term debt funds suitable for 1-3 years of investment.


Liquidity in Fixed deposit doesn’t come free of cost. If a person decides to withdraw the FD amount before maturity period, then he has to pay penalty and is charged from the final amount.

Mutual funds are considered highly liquid fund. Investment redeemed before 1 year has to pay exit load of 1%. The exit load and time frame depend from fund to fund. Investment unit redeemed after one year are not charged with exit load and full value is paid to the investor.

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How to Invest

Fixed deposit are generally lump sum and one-time investment done in the bank and is linked through Saving bank account.

Investment in Mutual funds is done in two ways, either lump sum or SIP. In lump sum or one time you invest in the particular fund at a price (NAV). In Systematic Investment Plan (SIP), one can invest a small amount of money periodically into the selected mutual fund. ( for example: On 20th of every month Rs 1000 will be invested into the selected fund on that day’s NAV)


Interest received from fixed deposit attract TDS according to the income tax slab of the person. So, the actual return from the Fixed deposit is much less than the interest rate of FD.

Mutual Funds enjoy the benefits of taxation for long term investment. Taxation of different fund types are discussed below.

  • Tax obligation for investment in equity mutual fund (those fund with equity portfolio of more than 65%) for period of more than one year are Tax-free and for less than 1 year are taxed 15% short term capital gains tax
  • For Debt fund, investment for a period of 1-3 years are considered short term and it is taxed @ 10% and for more than 3years, it is taxed 20% with the benefit of indexation.


FeatureFixed DepositMutual Funds
CategoryConsidered a good option for saving moneyConsidered good option for investment and growth of wealth
Risk ProfileDeposits are risk freeInvestments carry risk of market volatility, company risk, fund manager risk
ReturnReturn are fixed and is more than saving accountReturns are not fixed, generally outperforms FDs by big margin in long term
LiquidityGenerally these are not very liquid and had to pay penalty if withdrawn prematurelyConsidered highly liquid. Had to pay exit load if investment redeemed before 1 year period.
TaxationInterest received are tax deducted at source according to IT slab of the depositorEnjoys taxation benefit, Short term equity mutual are taxed 15% and long term are not taxed
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Fixed Deposits are the great option for saving money and to protect it from depreciation over the long term due to inflation. Fixed deposits are suitable in short term period as the investment in a short-term mutual fund with low-risk grade also gives same return. It is not suitable for long-term wealth creation. On the other hand, mutual fund investment benefits in longer duration for various factors like above average return, taxation benefit, liquidity and easy investment option through systematic investment plan.

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