Personal Finance

Fixed Deposit vs Mutual Fund: Comparison, When to choose what?

fixed deposit vs mutual fund

When deciding between a fixed deposit (FD) and a mutual fund for investment, it’s essential to consider several factors including risk tolerance, investment goals, time horizon, and expected returns. Here is a comparison of the two options:

Fixed Deposit (FD)

Definition: A fixed deposit is a financial instrument provided by banks or non-banking financial companies (NBFCs) that offers investors a higher rate of interest than a regular savings account, until the given maturity date.

Key Features:

  • Safety: FDs are considered one of the safest investment options since they are not market-linked.
  • Returns: The interest rate is fixed and guaranteed. Typical returns range from 3% to 7% annually, depending on the tenure and the institution.
  • Tenure: Flexible tenures ranging from 7 days to 10 years.
  • Liquidity: Premature withdrawal is possible but usually involves a penalty.
  • Taxation: Interest earned on FDs is taxable as per the investor’s income tax slab.

Mutual Funds

Definition: A mutual fund is an investment vehicle that pools money from many investors to purchase securities like stocks, bonds, and other assets.

Key Features:

  • Risk and Return: Returns are market-linked and can vary. Equity mutual funds typically offer higher returns (potentially 10% to 15% or more annually) but come with higher risk. Debt mutual funds are relatively safer with moderate returns (around 6% to 9%).
  • Diversification: Mutual funds provide diversification by investing in a variety of assets, which can mitigate risk.
  • Liquidity: Mutual funds offer high liquidity, as units can be bought and sold at any time. However, some funds may have exit loads if redeemed within a certain period.
  • Taxation: Equity mutual funds held for more than one year are subject to Long-Term Capital Gains Tax (LTCG) of 10% on gains above ₹1 lakh. Short-term capital gains (held for less than one year) are taxed at 15%. Debt mutual funds have different tax implications based on the holding period.

Comparison between Fixed Deposit vs Mutual Funds

FeatureFixed Deposit (FD)Mutual Funds
RiskLowVaries (High for equity, low to moderate for debt)
ReturnsFixed (3% to 7%)Variable (6% to 15% or more)
LiquidityModerate (penalty on premature withdrawal)High (subject to exit loads in some cases)
TaxationTaxable as per income slabVaries: LTCG and STCG tax implications
Investment TenureFlexible (7 days to 10 years)Flexible (can be tailored to goals)
SafetyHigh (principal guaranteed)Varies (depends on the type of mutual fund)
Suitable forRisk-averse investorsInvestors with varied risk appetites

When to Choose What?

  • Fixed Deposits:
    • Suitable for conservative investors who prioritize capital protection.
    • Ideal for short to medium-term financial goals.
    • Suitable for those who need a predictable income from interest.
  • Mutual Funds:
    • Suitable for investors willing to take on some risk for potentially higher returns.
    • Ideal for medium to long-term financial goals, such as retirement or children’s education.
    • Suitable for those who want to diversify their investment portfolio.

Ultimately, the choice between a fixed deposit and mutual fund should align with your financial goals, risk tolerance, and investment horizon. It can also be beneficial to have a mix of both in your investment portfolio to balance risk and returns.

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By: Pankaj Bansal , Founder at

CEO & Editor
I'm Ved Prakash, Founder & Editor @Newsblare Media, specialised in Business and Finance niches who writes content for reputed publication such as,, Motley Fool Singapore, etc. I'm the contributor of different... news sites that have widened my views on the current happenings in the world.

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