FD Vs Mutual Fund: Which Is Better?   

By | February 9, 2019

 Should you stick with a classic Fixed Deposit or should you explore a little more and try out Mutual Funds. Which is better? Let’s find out.   

FD Vs Mutual Fund: Which Is Better?   

Investors often find themselves in an uneasy spot when it comes to choosing the perfect combination of investment options. On one hand, you have the age-old PPFs, FDs, and bank deposits while on the other hand, you have the lucrative options of investing in Mutual Funds and equities.

Both Fixed Deposits and Mutual Funds have one thing in common: they are long-term investment tools. But the real question is if you are an investor eager to flex your financial muscle, will a Fixed Deposit be enough to meet your goals? Let’s find out.

Returns On Fixed Deposits 

Fixed Deposits offer a predetermined rate of interest over a specified period. The rate of interest , although predetermined, usually varies from one bank to another.

What it essentially means for you is that, if you keep your money locked in for the duration stipulated by the bank, you are bound to get the exact rate of interest offered. For e.g, if the FD interest rate is 9% monthly compounding and you choose to invest Rs 10,000 for a period of 1 year, you will make a neat Rs 938, bringing the final value of your investment to Rs 10,938.

You can use a Fixed Deposit calculator to do this calculation on your own.

Additional Reading:Fixed Deposits Or Liquid Funds: Where To Park Your Surplus For Stable Returns?

Returns On Mutual Funds 

Since Mutual Funds majorly invest in equities and debt instruments, the returns on Mutual Funds are completely driven by the performance of the market. In a bull market, the returns could go as high as 20% and above, while in a sluggish market, you can expect the returns to be less.

Risk Factor  

The risk factor is almost negligible on Fixed Deposits and that is the reason why so many unassuming investors flock to it without thinking twice. When it comes to Mutual Funds, the risk is significantly high as the market fluctuations affect the volume of return.

Additional Reading:Mutual Funds Starter Pack: 8 Things To Keep In Mind Before You Start Investing


Interest income from bank Fixed Deposits is taxed as per your tax slab. If the total income from Fixed Deposits is less than or equal to Rs. 10,000, you can claim exemption under Section 80TTA.

The situation with Mutual Funds is a little different. With Mutual Funds, you need to be aware of the term called ‘capital gains’.

Capital Gains

If you hold your equity Mutual Fund investment for over a year, it will be considered as long-term capital gain (LTCG) whereas if you hold them for a period that’s less than a year, it will be considered as short-term capital gain (STCG).

Taxation on your Mutual Fund will depend on the type of Mutual Fund you are invested in. There are mainly two types of funds available in the market:  tax-saving funds: which consists of the hugely popular ELSS schemes and non-tax saving funds: Equity Funds, Debt Funds, and Hybrid Funds.


With Mutual Funds, you get the option of investing under tax-saving schemes known as Equity-Linked Saving Scheme (ELSS). If you invest in an ELSS scheme, long-term capital gains up to Rs 1 lakh are tax-free upon redemption.

Additional Reading: How Is ELSS Different From A Mutual Fund?

Equity Funds 

LTCG on equity funds of up to Rs 1 lakh are considered tax-free. If your long-term capital gain on your Equity Fund is more than Rs 1 lakh, the amount in excess of Rs 1 lakh will be taxed at the rate of 10% without the benefit of indexation.

If you redeem your investments before 12 months, you will pay a 15% tax on the STCG.

Debt Funds 

LTCG on Debt Funds are taxed at the rate of 20% post indexation whereas STCG from debt funds are added to your income and calculated as per your current income tax slab.

Equity Hybrid Funds 

For Hybrid Funds, you will need to pay a 15% tax if you redeem your investments before 12 months whereas if you hold your investments for more than a year, you will pay 10% as tax if the gains are more than Rs 1 lakh.

Mutual Funds Are Better For Long-Term Growth

Although both these investments have their share of drawbacks, Mutual Funds, clearly stand out as the winner because of a number of reasons.

Returns Are Higher 

Returns on Mutual Funds are significantly higher than that of Fixed Deposits. Unlike Fixed Deposits, the growth is not automatically clipped with a pre-ascertained interest rate. If the markets do well, you will get a profit that far surpasses anything else. Even if the market doesn’t do well, you will still make a lucrative amount if you stay invested long enough for the slump to pass.

Tax Advantage 

With ELSS, you get to invest up to Rs. 1.5 lakhs a year and claim tax deduction under section 80C.  What’s more? Capital gains up to Rs. 1 lakh are tax-free if you stay invested for at least three years.

Multiple Options 

As far as Mutual Funds are concerned, your options are unlimited. If you are averse to taking risks, you can safely consider Debt Mutual Funds. For those who are concerned about paying high taxes, consider ELSS. For the growth-oriented, Equity Funds are always a great option.

Mutual Funds are for the ones with an appetite for growth and a vision for change.

Ready to soar?

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Category: Mutual Funds UCN

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