Fixed deposits (FDs) and mutual funds are the two most popular investment options available to investors. While the former has been the de-facto choice for most, mutual funds have caught the fancy of investors of late. Before you decide to invest in either of them, it’s essential to compare them on various parameters. In this article, we have compared both these instruments on several aspects which would help you make an informed choice.

  1. Return on investment
  2. The returns from FDs are predetermined with a fixed rate of interest over a stipulated period of time. The rate though fixed, varies across banks. Also, the returns are latent to market volatility. It means that even in the case of extreme market swing, the end corpus wouldn’t take a hit.

    On the other hand, returns from mutual funds aren’t fixed. They vary depending upon the performance of the underlying stocks. However, returns from mutual funds generally higher compared to fixed deposits in the long run.

  3. Associated risk
  4. FDs are one of the safest financial instruments with almost no-risk. This acts as a big source of relief for investors. Once you avail an FD, you get fixed returns on your investment.

    Mutual funds, on the other hand, carry a higher element of risk. This is because their performance is market-linked. However, this risk can be eased to a great extent if you invest in mutual funds through systematic investment planning (SIP), where a fixed amount is deducted from your account and invested in your chosen fund. Also, the risk factor comes down to a great extent when you remain invested for the long haul.

  5. Liquidity and premature withdrawal
  6. FDs are less liquid compared to mutual funds. In case of a tax-saving saving FD, you can’t liquidate your investment before 5 years. On the other hand, if you wish to break a normal FD before its tenure, you need to pay a penalty as decided by the bank.

    In case of mutual funds, most fund houses charge an exit load of 1% if you redeem your investment before a year. But if you do so after a year, no charges are levied. You can easily liquidate your mutual fund units, when required and the money is credited into your account the next day.

  7. Taxation
  8. Interest earned from fixed deposits is fully taxable under the Income Tax Act. However, note that investment made under a tax-saving FD is subject to tax benefit under section 80C.
On the other hand, profits made from mutual funds qualify as short and long-term gains depending on the holding period and the type of fund. Also, note that investment in an equity linked-saving scheme (ELSS) also qualifies for tax benefit under section 80C of the Income Tax Act.

Note that both fixed deposits and mutual funds are prudent investment avenues to build a corpus for various life goals. The choice depends on your objectives, investment horizon and most importantly risk appetite.

Learn more about Mutual Funds for a good personal financial management.


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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