Mutual Funds vs Fixed Deposit: Returns, Risks, Exit options and taxation

A well-rounded and risk-adjusted portfolio has a place for both these assets that play a very specific role.

How to choose between mutual funds and fixed deposits

Mutual funds and fixed deposits (FDs) are both time-tested, popular investment options that have helped investors meet their financial goals. While deposits are fixed income instruments, mutual funds are linked to market performance.

Let us look at the main differences between FDs and mutual funds.

Also Read: Investing In Gold Vs Investing In FD - What Should You Consider?

1. Investment mode

Fixed deposits can be opened with any public or private sector bank, as well as with the post office or non-banking finance companies (NBFCs) authorised to accept deposits. Investments in mutual funds, on the other hand, can only be made with SEBI-registered fund houses known as Asset Management Companies (AMCs).

2. Returns

Investing in fixed deposits earns you returns at a predetermined rate of interest that is guaranteed for the duration of the investment. Mutual fund returns are linked to the stock market and subject to market risks, with no guarantee of returns.

3. Variety

A fixed deposit is simple and straightforward. The only possible flexibility is with the tenure of the investment (15 days to 10 years). Mutual funds are very versatile, with hundreds of options to choose from. Not only can you find funds across the risk-return spectrum from debt to equity, but also specialised and thematic options.

Also Read: Best Equity Mutual Funds To Invest In India

4. Risks involved

Fixed deposits carry little to no risk; your capital and returns are assured. Risk in the case of mutual funds will vary depending on the type of fund and exposure to equity.

5. Exit options

If you wish to withdraw your fixed deposit before maturity, the financial institution will recalculate the interest based on the holding period and may charge a penalty for premature withdrawal. Most mutual funds are open-ended, which means you can exit whenever you want and the proceeds are calculated basis the NAV on the day of exit. However, some mutual funds like fixed maturity plans (FMP) and tax-saving equity-linked savings schemes (ELSS) come with specified lock in periods, before which withdrawals are not possible.

6. Taxation

Interest income from FD is fully taxable. It is added to your total income and taxed as per the applicable income tax slab. If the interest income exceeds Rs 40,000 in a financial year, the tax will also be deducted at source (TDS). Equity-based mutual funds are subject to short term capital gains (STCG) tax at 15% for holding periods less than one year and long-term capital gains (LTCG) tax at 10% for holding periods over a year for earnings that exceed Rs 1 lakh in a financial year. In the case of debt funds, STCG is chargeable at 30% for holding periods less than three years and LTCG at 20% with indexation for holding periods exceeding three years.

Also Read: Mutual Funds Vs Shares - Which One To Choose?


In most cases, it is not a choice of mutual funds vs fixed deposits but rather how they fit in with one’s investment objective. A well-rounded and risk-adjusted portfolio will have a place for both these assets, which play very specific roles. The weightage will depend on various factors such as your risk appetite, investment timeline, goals you wish to achieve, and overall asset mix. An understanding of how these investments work should allow you to make an informed choice.


Related Article

Premium Articles

Union Budget