FD vs Mutual Funds- Differences Between them & Where to Invest

funds can offer

When it comes to investing, Indians prefer doing it the old-school way. As a result, FDs continue to be one of the most popular investment options. Most Indians find fixed deposits to be favorable as it involves no risk. The returns in a fixed deposit are guaranteed and adhere to the bank’s fixed rate, regulated by the Reserve Bank of India.

The principal amount invested in mutual funds has the potential to increase in value. If you stay invested in a mutual fund for a long period of time, your money has the potential to earn better returns as your mutual fund investments are linked to the capital market. But in recent times, mutual funds have become very popular due to their potential to generate higher growth than FDs. Note the key differences between mutual funds and fixed deposits before investing. These saving and investment instruments are curated for people with different risk appetites and should be treated as such. Now that you know the differences between a mutual fund, SIP and an FD, you can make the right decision after considering all factors.

  • Long-term debt investments come with indexation benefits at a 20% tax rate.
  • In ancient times, people used to use carts to go from one place to another and took several days to reach their destination.
  • It comes to SBI; the FD gets an interest of 6.7 percent in three years and will have an interest of 6.75 in five years.
  • For example, let us assume that you invested a sum of Rs. 10,00,000 for 5 years, with a bank that offers an interest rate of 6% per annum.

Mutual fund risk also depends on the type of fund one chooses to invest in. Fixed Deposits are the traditional investment choice for most Indian households. As per RBI research released in June 2020, 53% of average household financial assets are invested in Bank FDs . Though mutual funds have a long history in India with setting up of Unit Trust of India in 1963, popularity of mutual funds among retail investors have grown only in the last 20 – 25 years. As per AMFI data, AUM of mutual funds in India has grown at CAGR of nearly 17% over the last 20 years.


When you are looking for an investment, you can either choose FD or mutual funds. Sytematic filtering of mutual funds across asset classes and criterias to suit your investment needs. Because buying a ULIP, offers them a life cover along with an investment avenue. That way they can be assured that if something were to happen to them, their loved ones will be given the death benefit.

fd and mutual

Do you have a sum of money you wish to put somewhere and earn a little interest on the same? An FD, also called a term deposit, is a saving tool to invest a lump sum for a tenure of your choosing. Your money is safely invested, and you can earn returns on the same. The rate of interest offered on FDs varies from lender to lender. Since the returns are not market-linked, fixed deposits are considered a relatively safe, risk-free option.

Fixed Deposits VS Mutual Funds – A Comparative Analysis

Mutual funds are adjusted with inflation rates which gives you a better return on your investment. These help to beat inflation, especially if you invest in stock mutual funds. However, stock mutual funds also come with considerable risk factors. Mutual funds can offer you inflation-adjusted returns and faster growth as compared to FDs. Although you can always choose the risk as per your suitability, there will always be some degree of risk involved with mutual funds. In con/trast, FDs provide you with stability and a guaranty, but the returns are low and eventually lose value compared to inflation.

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To open a fixed deposit online, the customer can log into the online portal of their bank. This allows them to complete the process from the comfort of their own home, without having to visit a branch in person. It is important to carefully compare different FD options and read the terms and conditions before opening an FD online to ensure that the customer is making an informed decision. In case interest rates soften, liquid funds can deliver returns higher than the portfolio yield, and vice versa. As you can see from the above data, the effective tax rate is 35% in FD which means you are paying 35% of your total earned interest.

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This is because FDs offer fixed returns on your principal amount , which means that the amount of money you put in each month will always be the same. The first thing that works in favor of Bank FDs is the assurance of guaranteed returns. Plus, you come to know how much you will get as the return amount at the time you invest the money. Different banks offer different returns on the money invested for different time-frames. That means, if a certain amount of money is invested in a Bank FD for three months, then its interest rate would be less than the interest rate of a 12-month FD.

In this blog, we will understand the difference between FDs and mutual funds in detail to find out which is the better avenue for our money. Key difference between fd and mutual funds’ which has a S.V of 90. There is no single answer when you are looking to select between FDs and mutual funds.

The biggest disadvantage of a fixed deposit is the inflation rate. As inflation keeps increasing, there is hardly any adjustment of the returns in an FD. Moreover, you can only make one lump sum contribution at the time of opening the deposit. In comparison, mutual funds can be opened directly with the mutual fund house or indirectly through a broker.

However, if you understand your risk appetite and invest accordingly, mutual funds can be good investment options in a declining interest rate environment. Indexation benefits in long term capital gains taxation of debt funds, certainly give mutual funds a significant tax advantage over FDs. You should evaluate your financial goals and risk appetite to make informed investment decisions. When people constantly ask which is better, mutual funds or fixed deposits, it isn’t necessarily a fair comparison because these two financial products differ in one major aspect.

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For example, let us assume that you invested a sum of Rs. 10,00,000 for 5 years, with a bank that offers an interest rate of 6% per annum. You would be receiving Rs. 60,000 as interest payment each year for a 5-year period. Based on your financial needs, you can choose to have this interest amount deposited into your account on a monthly basis or once every quarter or once a year. Bank FDs are unsecured, whereas debt funds are secured by the securities they hold. Debt Funds could be preferred over FDs, as debt funds are secured, offer better liquidity, potentially higher returns than portfolio yield and are far more tax efficient.”

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Types of Mutual Funds

The interest that you earn from FD is taxed as per your income tax bracket, irrespective of the tenure of your deposit. Investments in securities market are subject to market risks, read all the related documents carefully before investing. SIPs eliminate the need for investors to monitor interest rates because you make investments regularly. A Fixed Deposit provides interest-based returns on the amount deposited, while a Mutual Fund provides returns on the amount invested. Depending on your financial goals, you can decide if a Mutual Fund, Systematic Investment Plan or a Fixed deposit is the right choice. This allocation strategy balances potential returns and risk while providing diversification benefits.

FDs are considered relatively safe because they provide a fixed return, and the invested amount is protected. That way, a guaranteed safety factor is one of the biggest benefits of FDs, but that was before the PMC bank scam came into the light. So, in case of a bank default, you will only get the amount that has been insured, which is up to Rs 5 lakh. That is, even if you have invested Rs 10 lakh you will get Rs 5 lakh, which is the insured amount. Nowadays, all the banks stamp the necessary information about the Rs 5 lakh sum insured on the depositor’s passbook, as per the RBI rule of 2017.

Difference between fixed deposits and mutual funds

In a fixed deposit, your money is deposited safely with a bank, and you can earn returns by way of interest on the same. However, in the case of a mutual fund unit, the net asset value of the units purchased may increase or decrease during your investment. This is because underlying assets determine the value of MF units.

Fixed deposits do not adjust the inflation rate as the rate of interest is decided beforehand. The real return received from your fixed deposits is reduced due to inflation. It is crucial to monitor the yield curve as it serves as a significant indicator of economic activity and financial market conditions. In a typical yield curve, long-term bonds tend to offer higher interest rates due to their increased duration risk and longer maturity.

For fixed deposits, you can deposit a lump sum amount at a bank. The bank will give you an option for a lock-in period which could be anywhere between one to five years. AnFDis an investment instrument that offers a fixed rate of interest for a fixed tenure. It is provided by most banks and NBFCs (Non-Banking Financial Companies).

While difference between fd and mutual fund Deposits are considered a traditional, safe investment option, Mutual Funds offer the potential for higher returns through market exposure. In addition to what is discussed above, many investors always wonder which has a better presence in India, mutual funds or fixed deposits? Traditionally, as we have mentioned earlier, fixed deposits have always been popular because the investors consider fixed deposits safe and risk-free.

tax saving

Not only do they have better return-generating capabilities, their taxation is also more favourable. You don’t have to pay tax on mutual funds while your returns are accumulating. You pay tax only when you redeem or sell your mutual fund units at a profit. Also, when it comes to beating inflation, mutual funds do a pretty good job.

If money is withdrawn before the maturity of the lock-in period, it considerably reduces the interest rate. None of the research recommendations promise or guarantee any assured, minimum or risk free return to the investors. To know whether you should pick an FD or mutual fund, you should also know their differences.

Canara HSBC Life Insurance offers a wide range of saving plans that you can invest in for a variety of purposes. For example, the Guaranteed Income4Life plan offers guaranteed regular income to meet your post-retirement expense. It also protects you with a life cover along with giving you enhanced income for paying higher premiums. Buy the best saving and investment plan as per your risk appetite, financial goals, and requirements. In this article we discussed difference between FD and mutual fund from a risk stand point. FDs give assured returns while mutual funds are subject to market risks.