FD Vs Mutual Funds: Which One is The Best Option?


Summary: Mutual funds and fixed deposits differ on returns they offer, risks they carry, tax treatment and expenses involved. You should choose one based on your requirements as they serve a different purpose in your portfolio.

Mutual funds and fixed deposits are among the most popular investment instruments in India. Each of these fulfils a different purpose, and you should choose one based on your investment strategy. Listed below are the features of each of these that you should keep in mind to decide which one works better for your portfolio. 


The returns that you earn on mutual funds are linked to how the market behaves. Remember that you underlying a mutual fund are different equity and debt instruments – and equity instruments provide a return based predominantly on their performance on the stock market.

Fixed deposit schemes offer a guaranteed return. The interest that you would earn on a fixed deposit is decided at the time of investment and you will get exactly that on maturity. Both the tenure and the interest rate are fixed when you make the deposit. They do not change throughout their tenure. Fixed deposit rates for senior citizens is typically 0.5% higher than the rates offered on fixed deposits of the same tenure.  


The risks that your investment in mutual funds face depend on the type of mutual fund you have chosen and the decision that your fund manager makes. These are typically lower than the risk you would run when investing in bespoke equity because of diversification, but you are dependent on your fund manager’s judgement for the same.

FDs carry virtually no risk. The returns are guaranteed, some fixed deposit schemes may even carry a sovereign guarantee. It also means that the interest rate earned on these instruments is not as high as the returns on mutual funds.


When you decide to invest in a mutual fund, not all the money is used to purchase the underlying investment instruments. Some of it also goes towards the fee for managing the fund and other charges. FDs, on the other hand, have no such expenses either at the onset or through the tenure of the deposit.


Most mutual funds have a lock-in period. After this period, you can withdraw your money without paying any fees. If you would like to make a withdrawal earlier, you will have to pay a charge called the exit load. Typically, the exit load is 1%.

If you decide to withdraw your fixed deposit before the tenure is completed, you will have to pay a penalty on the interest earned for the duration for which the deposit was held.

Tax treatment

Earnings from mutual funds are subject to capital gains tax. At present, the STCG on mutual funds is charged at 15% and the LTCG is charged at 10% of earnings over ₹1 lakh. Debt funds attract an LTCG tax of 20% post indexation.

The interest earned on fixed deposits is considered a part of your annual income and is taxed based on the income tax slab you fall under. A TDS of 10% is deducted if the interest earned is higher than ₹10,000 a year. You can avoid this by either choosing to invest in a tax-saving fixed deposit or presenting a form 15H or 15G.