5 Differences between FD & Mutual Fund


Fixed deposits and mutual funds are among the most popular types of investments. Investors can achieve their objectives by obtaining both consistent and safe good returns.

Mutual funds give returns that depend on how well the market does, while fixed deposits give a fixed return at a set rate of interest.

Mutual funds and fixed deposits are two commonly used financial planning instruments.

What are fixed deposits?

Set deposits, as the name indicates, provide investors with fixed interest rates for certain lengths of time. An FD term might last anything from seven days to ten years. In bank FD interest, compounding is employed so that you may receive interest on the interest that has been paid. Suppose a bank offers 6% interest on deposits with a three-year fixed rate, for example (compounding yearly). If you deposit 100 rupees, your account will have 106 rupees after a year. You will get 6% interest on the principal plus interest in year two, which equates to 6% on 106 or 6.4 rupees. Compounding is what led to the extra forty pence.

The dropping interest rates are concerning, mainly for seniors who invest a significant percentage of their money in FDs. Over the last 25 years, the FD interest rate has been secularly falling. In response to COVID-19, banks and the RBI jointly reduced interest rates on fixed deposits. Following taxes, FD interest rates can hardly keep up with growth. The amount of tax on the FD interest depends on the depositor’s income tax band. When FDs are compared to mutual funds, there is no tax indexation advantage since the FD interest rate is set during the FD. There is little safety against rising interest rates because of the low interest rates on fixed deposits.

What are mutual funds?

Mutual funds are financial vehicles created by combining the money of many members and are governed by asset management organisations. Mutual funds are stock or bond portfolios that unit holders may make choices about. Depending on the client’s financial requirements, mutual funds provide a variety of investment possibilities. Debt funds deal in the money and bond markets, while equity mutual funds mainly trade stocks. While income production is the main goal of debt funds, capital growth is the main goal of equity funds.

Choose investment strategies with fund managers who have a track record of doing well over the long term.

Regarding tax benefits, mutual funds outperform fixed deposits significantly. The assets that save you the most taxes are mutual funds. In equity funds, long-term gains held for more than a year are initially exempt from tax up to Rs 1 lakh before becoming taxable at 10%. 15% tax is applied on short-term earned income for less than a year.

Short-term capital gains are those held for less than 36 months and are taxed in debt funds at the investor’s income tax rate. After taking into account the benefits of indexation, long-term gains (held for more than 36 months) are taxed at a 20% rate. In contrast to fixed deposits, debt funds do better.

FD vs. Mutual Fund

Fixed deposits are usually the investment option of choice for a variety of Indian families. 53% of the median household’s financial assets are held in bank FDs, according to figures from the RBI that were released in June 2020. Despite having a long history in India owing to the creation of the Unit Trust of India in 1963, mutual funds have only recently—in the last 20 to 25 years—become popular among individual investors. According to AMFI figures, India’s AUM of mutual funds has grown at a CAGR of around 17% over the last 20 years. Despite their rapid rise, just 7% of household savings are held in mutual funds, according to statistics from the RBI. We will contrast FD and MF to assist investors in determining whether to invest in mutual funds or fixed-income securities.

Five Key Differences between Mutual Funds and FDs


An FD’s rate of return is guaranteed, fixed, and ranges from 6 to 8% annually. Mutual funds, on the other hand, do not have a set rate of return. The returns vary depending on the mutual fund type, market performance, length of investment, etc. For instance, long-term returns from stock mutual funds might reach 12 to 13%, while those from debt funds can range from 7 to 9%.


Fixed deposits, or risk-free investments, offer guaranteed returns, thereby eliminating risk. On the other hand, mutual funds provide various risk levels based on the asset class, the length of the investment, and market volatility. The results are hazy and might alter over time. However, mutual funds also provide better returns than FDs.

Investment Techniques

You may open a fixed deposit with a bank or an NBFC. When the account is established, a single lump-sum gift is permitted. Contrarily, mutual funds may be opened directly with the organisation that manages them or indirectly through a broker. Mutual funds also provide two ways to invest: as a single contribution or via SIPs (systematic investment plans).


Withdrawals from fixed deposits only provide a small amount of liquidity. They have a set tenure, and fines punish early withdrawals. However, there are no early withdrawal fees, and mutual funds have a high degree of liquidity. When you redeem your money, an exit load could be assessed.

Your income is increased by the interest you get when your fixed deposits mature. It is taxed based on your tax bracket. Funds from mutual funds are taxed quite differently from other forms of income. Depending on the holding period, capital gains are subject to short-term or long-term taxation.

Influences of Inflation

To combat inflation, more than just fixed deposit yields are required. Inflation eats away at your money. In a situation with substantial inflation, you would get a negative return. In addition, an FD’s interest rate is decided when the deposit is established and fixed. Mutual funds, however, could provide inflation-adjusted returns.


You may choose between mutual funds and fixed-income securities after taking into account your particular demands and financial goals (FDs). You may now decide based on your knowledge of the differences between fixed deposits and mutual funds.

If you want to invest your money for future use safely, it is better to choose an FD. Also, even though mutual funds are riskier than FDs, the rewards might be large. To learn more about these, you can visit Piramal Finance for more details.