Fixed Deposits or Mutual Funds: Comparison Analysis

Fixed Deposits or Mutual Funds: Comparison Analysis

Your money must be exerting to form you extra money, and there are not any two ways about it. And when it involves that, mutual funds or fixed deposits have been a quandary like none other among Indians.

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

The general tendency towards fixed deposits peaked around January 2008, when the market was in tatters thanks to the worldwide recession, and other people sought a safer haven for his or her corpora.

Total deposits hit an all-time high of 29.3% in January 2008, maintaining steady popularity through that period. Total AUM within the open-end fund sector, on the opposite hand, sharply declined around March 2008 and clocked a contraction of seven .32% in FY09.

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

Fixed Deposits or Mutual Funds

1. Meaning

Fixed deposit:

A fixed deposit may be a non-market-linked investment instrument, where you’ll park a selected amount for a predetermined period and earn interest at an agreed rate.

However, to earn returns fully, you would like to stay your money locked in an FD account for a predetermined period.

Mutual funds:

Imagine a bag filled with stocks of various companies, bonds, corporate and government debentures, and other sorts of securities – that’s an open-end fund. This investment device pools the corpora of several investors and funnels it towards varied sorts of securities.

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

2. Types

Fixed deposit:

Cumulative FD – Here, the interest of your FD balance earns periodically is reinvested into that account. Essentially, the interest is compounded. 

Non-cumulative FD – By investing in this type of FD, you can receive periodical interest pay-outs. 

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

Mutual funds:

The Equity mutual funds – The lion’s shares of capital in equity mutual funds are invested in stock.

Debt mutual funds – These funds are fixed-income instruments like debentures and bonds in mutual fund. 

Hybrid mutual funds – Underlying assets include both stocks and fixed-income instruments in hybrid MFs. 

You may encounter other sorts of MFs also, like fund-of-funds and index funds.

3. Returns

Fixed deposit:

When you invest during a fixed deposit, you get to understand what you’ll be earning by the top of the maturity period to the dot.

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

But, that doesn’t affect the income of somebody who has locked their investment previously at a specified rate.

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

YearInterest Rate
1991 – 9213%
1995 – 9613%
1996 – 97 12% – 13%
1997 – 98 11.5% – 12%
1998 – 9910.5% – 11.5%

Since 2013 – 14, FD rates had gradually declined apart from 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 upon market conditions and the way the underlying assets are performing.

Hence, the knowledge of returns is lower, and investors assume varying degrees of risk counting on the asset allocation. As an example, in 2020, the continued depression has stunted the performance of MFs, with the very best equity funds offering a mean 5 year return of around 10%.

However, generally, returns from mutual funds began to seem promising after the economic liberalisation in 1991.

4. Taxation

Fixed Deposit:

The interest on income from FD’s accounts attracts TDS if:

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

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

But, if your total income during a year is a smaller amount than Rs. 2.5 lakh, TDS isn’t applicable. There in case, you’ll submit Form 15G – for general citizens – or Form 15H – for senior citizens – to the financial organization.

Mutual funds:

For equity-based funds, the taxation will be:

  • 15% STCG if you hold the MF units for fewer than 12 months.
  • 10% LTCG without indexation benefit if you hold the MF units for quite 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 quite 36 months.
  • Returns are going to be taxed as per the slab rate if the units are held for fewer than 36 months.

5. The way to Invest?

Fixed deposits:

You can invest during a hard and fast certificate of deposit account by approaching any bank or NBFC. You’d wish to deposit a lump-sum amount, which may be locked certain a period of your choice.

Mutual funds:

There are two ways to take a position in mutual funds –

  • Lump-sum
  • SIP

SIP provides the advantage of rupee cost averaging. you’ll approach an AMC or invest in MFs through third-party platforms.


Mutual FundsFixed Deposits
One-time charge, entry load, and exit loadPenalty charge for premature withdrawal 

Alongside an analysis of the market conditions and costs, you ought to also consider factors like age, investment horizon, objective, and risk-aptitude when weighing the 2 options – fixed deposits and mutual funds to undertake a sound financial decision.

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