Fixed Deposits or FDs are among the top saving schemes where the bank offers a fixed interest rate till maturity. It is supposed to be the safest yet most reliable form of investment at a steady return rate with no or almost zero risks. Due to these factors, other investment instruments which could have provided more returns on the same investment and tenure are neglected.

Similar to other investment techniques, fixed deposits allow investors to create a goal depending on the tenure and amount of money they want to keep invested till maturity. And most people in our country consider this as an option to save money for future goals, purchases, education, marriage and what not. Backed by the promises of banks to have no change in interest under different market conditions, fixed deposits are more attractive than mutual funds, debt funds or any other market security.

Fixed Deposits vs. Mutual Funds

Since investing in mutual funds can give same or higher returns as of fixed deposits, we are going to put it in focus and talk about why one should look at investing in mutual funds rather than FDs.

If we speak of the current scenario, most people believe that market-related securities are less stable than fixed deposits. It’s true, however, considering the prevailing market scenarios and other categories of mutual funds that invest only in debt and cash equivalents, then the returns provided by MFs is much higher than the fixed deposits.

Most of the banks offer seven percent or more on the fixed deposit, whereas, if we look at the MF investing in the debt and cash, the returns range from eight to ten percent, which is a huge if we consider a large amount investment is flowing into the funds.

If we put real figures into this simple return equation, then MFs can quickly earn you more than five figures profit than a traditional fixed deposit.

Why are Mutual Funds better than FD?

Investment Amount

The very first difference which sets off young generation from investing in fixed deposits is the minimum limit set by the banks. FDs require a person first to save up the minimum amount and then invest and keep it locked in the account till maturity. A fixed deposit has maturity period of 12 to 60 months, and the investor receives interest in every three months by cheque or direct transfer to the savings account. However, the person can also choose to reinvest the returns in FD.

In the case of Mutual funds, you can make a lump sum investment as per the appetite or keep investing monthly by creating a SIP or systematic investment plan. MFs do not have any tenure; however, ideal investment time is one year as it avoids the exit loads and other fees that are required MF companies to maintain the fund.


Let’s talk about the performance of both fixed deposits and mutual funds. If we look at the rates from different banks in India, the standard interest rate offered comes at about six percent or less. The highest interest offered is 8 per cent and by the RBL Bank.

There are several categories of mutual funds, so before we even start comparing it with the FD, let’s learn a thing or two about the mutual funds and pros and cons of each category.

We are going to talk about only two different types of MFs today, balanced and debt funds. Balanced funds are those who divide their investment in such a way that majority of it goes to equities or stocks and remaining to the debt of cash equivalent investments. Now fund managers do this to maximize the returns from investments and manage the losses with debt funds.

This way in a long run, good returns are achieved with moderate risk. Moving further, another category, debt funds, invest almost everything in cash or debt funds. It reduces the risk and also creates returns high enough to beat FD investments.

Debt funds offer returns of about 9 percent whereas balanced funds can be as high as 22 percent depending on the market scenarios.

Tax Saving on Returns?

Investment instruments are also excellent at saving taxes under Income Tax Act Section 80C. Both the investments allow tax-saving up to 1.5 lakh of investment, beyond that purchases or deposits are taxed as per the income slab. Same is applicable for the fixed deposits and mutual funds, however, there’s a fundamental flaw in how fixed deposits help you save the taxes.

To understand this, let’s first talk about how mutual funds work under the section 80C. If investors are investing for one year or more, the returns generated with balanced or equity funds is almost zero, whereas, in the case of debt funds, which is FDs closest competitor, the gains are taxed as per your income slab if sold before three years. Meaning if you sell your units and redeem the investment after three years that tax is almost negligible and an investor can enjoy the interest without any worries.

On the other hand, in the case of fixed deposits, the tax is levied as per the user’s income tax slab irrespective of the tenure and amount in fixed deposit. Breaking it down in more simpler form, unlike mutual funds, FDs do not have any provision to let the returns be tax-free after a particular time frame.

In some of the cases, where an enormous amount of money is invested, fixed deposits could become a reason for the loss to the investor due to the taxes and inflation.

Withdrawals: Mutual Funds vs. Fixed Deposits

In both the cases, you can always withdraw the money at any given time. However, withdrawing money from mutual funds is different than the fixed deposits.

Let’s first talk about the mutual funds. In MF, if an investor redeems all of the investment before one year then the managers charge an exit load to manage the expenses, after one year, this becomes zero, and the person can enjoy returns after paying applicable taxes.

Whereas on the other end, premature withdrawal from an FD account brings in a lot of penalties. First of all, the banks charge a penalty as a part of pre-mature withdrawal and secondly the person doesn’t get returns as expected. It becomes even worse when you have to withdraw the money just after a few days of investment as a significant amount of money gets deducted in the name of penalties.

Concluding on this, mutual funds are much flexible with income tax, returns, and withdrawals.


Of all the metrics, the risk is a significant factor when it comes to investment. In the capital market, the risk is defined as the chances where you can lose your money. Perfect investment is a myth, and no such investment instrument has zero risks that can provide good returns for a lifetime.

If you think fixed deposits are safe and do not have any risk, then let me tell you, they are not. In an unfortunate event of economic chaos, banks can start reducing the interest, or in a worst case, you start losing money on your investment. However, chances of this happening are meager.

Compared to this, mutual funds have higher risk factors as they invest in stocks, equities for wealth appreciation and a small chunk towards cash and debt equivalents for stabilization. Under the same conditions mutual funds will have a significant impact compared to the FDs, and if the fund is of type debt, then an almost same type of consequences can be observed.

Balanced mutual funds are directly affected by the changes in the market, as in both high and low conditions these MFs change and appreciate or depreciate the returns.

If you are new to the investments and do not want to be worried about the market changes and its effect on the mutual funds, you can start with the debt category.

What is the minimum amount of investment required?

For fixed deposits, the minimum amount is set by the banks and depends on where you are opening your account. Some banks offer fixed deposit account starting from 1,000 and few set 25,000 or more as their lowest limit. Whereas on the other hand, mutual funds start at as low as ₹500 and even ₹100 sometimes.

On the contrary, there’s no upper bound to which you can invest for good returns. Investors deposit as high as seven figure amount in the fixed deposits, where in the case of mutual funds, they tend to purchase units from anything between four to seven figures in the form of the lump sum or SIPs.

Liquidity Factor

Let’s first define what is Liquidity in the market. It is a degree by which one can buy or sell an asset or the security. For example, the cash is the most liquid asset in any country whereas, if we look at the gold, real estate and other properties or securities they have less liquidity.

Fixed deposits also have less liquidity compared to mutual funds, and hence it is yet another factor where MFs take the lead on FDs.

Liquidity directly impacts the performance of FDs. During the demonization period, the liquidity increased as everyone started to deposit their cash in the banks for the RBI to replace it with the new notes. RBI reports stated that nearly five trillion rupees were collected in the bank directly affecting the performance of the market and fixed deposits.

As a result of this, SBI and few other banks started lowering their interest rates by 0.5 percent or less.

Investment: Fixed deposits or Mutual Funds?

If you are looking at wealth appreciation and willing to take some risk, then the mutual fund is something you should consider buying. Whereas, if you are paranoid about the market performance and do not want to take even a slight risk with your money, fixed deposit is your way. However, do not forget that in FDs you lock your money for the entire tenure to attain a return of mere 5-8 percent.

It all comes down to the amount of risk you want to take on the hard earned money and the time till you can invest. Depending on the tenure and investments, mutual funds can help you make a significant amount of money in approximately five to ten years. Whereas the same sum in the fixed deposits only receives five to seven percent appreciation.

How to invest in mutual funds

Investing in mutual funds these days very simple, you can always sign up at, do the KYC verification process and start purchasing. After uploading all the required documents, the platform will verify you and attach your bank accounts so that transactions are smooth and are completely hassle free and digital.

For investments similar to FD you can start with this Groww portfolio Better than FD.

Choosing the right fund, however, is a bit of a task. You first need to know what suits you,  what are your goals and how much risk you can take. Don’t worry; there’s no rocket science behind it. All the listings on Groww have detailed information regarding their performance, average returns in one and three years and also the risk they carry.

For fixed deposits alternatives you can take a look at this debt fund categories and also at this Better than FD scheme for starters.

How to invest in Fixed Deposits:

It is more of an offline process. All you need to do is call or visit the nearest bank branch along with the KYC documentation to open an account. Once the account is open, you can deposit your money and wait till maturity for the returns.

Final Verdict

Everything has pros and cons. Mutual funds offer high flexibility, tax savings, and returns but are risky. Whereas, fixed deposits are less volatile, have less flexibility regarding withdrawals and tax saving.

It’s up to the individual how the investments should be made. You can either go for the mutual funds or keep your money locked in the fixed deposits. The recommendation is often made on the risk appetite and expected returns.

Disclaimer: The views expressed in this article are that of the author and may not be same as that of Groww.