Fixed Deposit and Mutual Fund

Fixed Deposit and Mutual Fund: Which is better?


When investing your savings, look for safe options from which you can earn a high return. Both FDs as well as mutual funds are considered as safe investment options when compared to other instruments.

They provide you with substantial returns over a period of time at low risk and usually entail a shorter lock-in period. While investing, the biggest question that you need to answer is how can you earn more from fixed deposit ? You may also look for ways to maximise your gain from mutual fund by diversifying your investments. Therefore, it is important to weigh both the options carefully before investing your savings in any of these instruments.


Read on to know how fixed deposits differ from mutual funds.

● On the basis of returns

Fixed deposit offer you returns at predetermined FD interest rates during the whole tenor. This means that you can invest your money and earn consistent returns without worrying about market fluctuations. Invest in Fixed Deposit with NBFCs, for example, to earn returns up to 8.75% when you start a cumulative FD for at least 36 months.

When you invest in mutual funds, there is no standard rate, but you can earn lucrative returns up to 12% in up to 5 years. If being able to count on your earnings is important to you, keep in mind that you can check the maturity amount of your FD using FD calculator, while you cannot estimate the amount earnable from mutual funds.

● On the basis of risk

Fixed deposits have very low risk associated with them as your earnings are not subject to market performance. In fact, you may consider FDs risk-free as long as you choose a company FD that has a safe rating by agencies like ICRA. For this reason, you will earn fixed returns during your fixed deposit tenor at the rate of interest that is pre-decided.

On the other hand, mutual funds earnings are based on market performance and therefore involve a certain amount of risk. If you witness good market conditions, you may earn good returns while you may lose your savings if market crashes.

It is important to measure your risk appetite before choosing one of the two investment avenues. As a young professional, you can afford to invest aggressively and should choose safer options over time to meet your financial goals.

● On the basis of liquidity

You can withdraw money from your fixed deposit account before maturity in case of urgent financial requirements, but this will incur a small penalty. In the case of mutual funds, you cannot withdraw money until the minimum holding period has been completed, which is usually 3 years for SIP mutual funds, and you will be charged a penalty.

Before investing ensure you have an emergency cash reserve, so that you do not have to break your investments and lose out on interest earned. The good thing is that you can take a loan against FD or a loan against securities to fuel your short-term requirements at an affordable rate of interest in case you need finances.

● On the basis of the minimum amount invested

You can start investing in fixed deposits and begin enjoying interest earned with an amount as low as Rs.25,000 as you don’t have to incur any other expenses since no intermediaries are involved. However, in case of mutual funds, you will have to pay fees to intermediaries such as brokers and managers to manage your investment portfolio. However, with SIP mutual funds, you can start with an investment amount as low as Rs.500 per month.

● On the basis of tax implications

In the case of fixed deposits, you will have to pay tax for any interest earned above Rs.5000 for company FDs, according to your tax slab. While in case of mutual funds, you will have to pay no tax as the returns qualify for long-term capital gains. If you hold these equity mutual funds for more than 12 months then you are liable to pay 15% tax on short-term capital gains. You can save up to Rs.1.5 lakh under Section 80C of the Income Tax Act when you invest in ELSS.

It is essential that you consider the above points and weigh them against each other before you invest. Think about both your long-term and short-term goals and invest accordingly. Be sure to weigh in your financial position and do not invest more than 20% of your total savings into market-linked earning schemes.