Your money needs to work hard to make you more money, and there are no two ways about it.

And when it comes to that, mutual funds vs fixed deposits has been a quandary like none other among Indians. 

Perennially, Indians have vested their trust in fixed deposits, which prevalently speaks to the conservative mindset and lack of awareness regarding other investment options. 

The general tendency towards fixed deposits peaked around January 2008, when the market was in tatters due to the global recession, and people sought a safer haven for their corpora. 

Total deposits hit an all-time high of 29.3% in January 2008, maintaining steady popularity through that period. Total AUM in the mutual fund sector, on the other hand, sharply declined around March 2008 and clocked a contraction of 7.32% in FY09. 

However, as economic recovery began in earnest in 2009, the YoY growth rate of the MF sector skyrocketed to 52.27%, whereas fixed deposits’ growth rate declined below 25%. 

Fixed Deposits vs Mutual Funds 

1. Meaning

Fixed deposit

A fixed deposit is a non-market-linked investment instrument, where you can park a specific amount for a predetermined period and earn interest at an agreed rate. 

However, to earn returns in full, you need to keep your money locked in an FD account for a predetermined period. 

Mutual funds

Imagine a bag full of stocks of different companies, bonds, corporate and government debentures, and other types of securities – that’s a mutual fund. This investment device pools the corpora of several investors and funnels it towards varied kinds of securities. 

Mutual funds are generally liquid. Thus, investors can withdraw their money from MFs anytime they want. 

2. Types

Fixed deposit  

  1. Cumulative FD – Here, the interest your FD balance earns periodically is reinvested into the account. Essentially, the interest is compounded. 
  2. Non-cumulative FD – By investing in this type of FD, you can receive periodical interest pay-outs. 

Besides these, tax-saving FDs and senior citizen FDs are also some common types of fixed deposits in India. 

Mutual funds

  1. Equity mutual funds – The lion’s share of capital in equity mutual funds are invested in stocks.
  2. Debt mutual funds – These funds comprise fixed-income instruments like debentures and bonds. 
  3. Hybrid mutual funds – Underlying assets include both stocks and fixed-income instruments in hybrid MFs. 

You may come across other types of MFs as well, like fund-of-funds and index funds. 

3. Returns

Fixed deposit

When you invest in a fixed deposit, you get to know what you will be earning by the end of the maturity period to the dot. 

Financial institutions, however, revise the rates on which they are offering FDs from time to time based on factors like repo rate, which is currently 4%. 

But, that does not affect the income of someone who has locked their investment previously at a specified rate. 

The following table provides a glimpse into some of the historically highest FD rates for a maturity period of 3 – 5 years. 

Year Interest Rate
1991 – 92 13%
1995 – 96 13%
1996 – 97  12% – 13%
1997 – 98  11.5% – 12%
1998 – 99 10.5% – 11.5%

Since 2013 – 14, FD rates had gradually declined except for FY19, when there was a marginal rise from 6.58% – 6.75% in 1-year FDs. 

Mutual funds

In the case of mutual funds, returns depend on market conditions and how the underlying assets are performing. 

Hence, the certainty of returns is lower, and investors assume varying degrees of risk depending on the asset allocation. For instance, in 2020, the ongoing economic crisis has stunted the performance of MFs, with the top equity funds offering an average 5 year return of around 10%.

However, in general, returns from mutual funds started to look promising after the economic liberalisation in 1991.  

4. Taxation

Fixed Deposit 

The interest income from FD accounts attracts TDS if:

  • It is more than Rs. 40,000 (for general citizens)
  • It is more than Rs. 50,000 (for senior citizens)

The interest income you receive from FD is added to your total income and taxed according to the slab rate. 

But, if your total income in a year is less than Rs. 2.5 lakh, TDS is not applicable. In that case, you can submit Form 15G – for general citizens – or Form 15H – for senior citizens – to the financial institution. 

Mutual funds

For equity-based funds, the taxation will be:

  • 15% STCG if you hold the MF units for less than 12 months.
  • 10% LTCG without indexation benefit if you hold the MF units for more than 12 months and your returns exceed Rs. 1 lakh.

For debt-based funds, the taxation will be:

  • 20% LTCG with indexation benefit if the holding period is more than 36 months.
  • Returns will be taxed as per the slab rate if the units are held for less than 36 months.

5. How to Invest?

Fixed deposits

You can invest in a fixed deposit account by approaching any bank or NBFC. You need to deposit a lump-sum amount, which will be locked in for a period of your choice. 

Mutual funds 

There are two ways to invest in mutual funds – 

SIP provides the benefit of rupee cost averaging. You can approach an AMC or invest in MFs through third-party platforms. 

  • Charges
Mutual Funds Fixed Deposits
One-time charge, entry load, and exit load Penalty charge for premature withdrawal 

Alongside an analysis of the market conditions and costs, you should also consider factors like age, investment horizon, objective, and risk-aptitude when weighing the two options – fixed deposits and mutual funds to undertake a sound financial decision.