Fixed Deposit Vs Mutual Fund


Mir Amir SOhel

6/26/20233 min read

Looking to make your money work for you? The decision between fixed deposits (FDs) and mutual funds (MFs) can be quite the conundrum. These two popular investment options in India come with their own unique features, risks, and potential returns. Don't worry, though—I'm here to break it down for you and help you make the right choice.

What's the Deal with Fixed Deposits?

Imagine a bank account where you stash away a fixed sum of money for a predetermined period. That's a fixed deposit for you! In return, the bank promises you a fixed interest rate, agreed upon when you open the account. Keep in mind, though, that withdrawing your money early may result in a penalty. FDs are generally considered a safe bet, offering guaranteed returns and insurance coverage up to Rs. 5 lakh per depositor per bank, courtesy of the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Decoding the Mutual Fund Phenomenon

On the other side of the investment spectrum, we have mutual funds—investment vehicles that gather funds from numerous investors and invest them in a diversified portfolio of assets. This portfolio, comprising stocks, bonds, and more, is managed by skilled professionals who aim to meet the fund's objectives and generate returns for investors like yourself. The beauty of mutual funds lies in their flexibility—you can buy or sell units at any time, depending on the fund's type and scheme. However, be aware that they do carry varying levels of risk depending on the securities they invest in, subjecting them to market fluctuations.

Fixed Deposit Vs Mutual Fund: An Epic Showdown

Now, let's dive into the heart of the matter and compare the key aspects of FDs and MFs:

Returns: The Showdown Begins!

- FDs bring to the table fixed returns, set in stone from the moment you invest. Because the risk is lower, the interest rates tend to be on the conservative side².

- MFs, however, thrive on variable returns that dance to the tune of the securities in their portfolios. As a result, their returns can either surpass or fall short of FDs, depending on the ever-changing market conditions¹.

Risk: Navigating the Investment Battlefield

- FDs boast a reputation for being a low-risk investment option. With guaranteed returns and DICGC insurance coverage, they provide a certain level of stability and security².

- MFs, on the other hand, tend to venture into riskier territory. Their investments in securities expose them to market fluctuations, making returns uncertain and dependent on the fund's performance¹.

Liquidity: The Battle of Accessibility

- FDs are known for their relatively low liquidity. Once you've committed to a fixed maturity period, withdrawing your money before that comes with a penalty².

- MFs, in contrast, offer high liquidity. You have the freedom to buy or sell units at any time, depending on the specific fund and scheme. However, do keep an eye out for potential exit loads if you decide to redeem your units within a specified period¹.

Taxation: Conquering the Tax Terrain

- FDs face tax deducted at source (TDS) at 10% if your interest income in a financial year exceeds Rs. 40,000 (Rs. 50,000 for senior citizens). If you haven't submitted your PAN, the rate jumps to 20%. Furthermore, your interest income is added to your total income and taxed according to your tax slab².

- MFs tackle capital gains tax based on the fund type and holding period. Short-term capital gains (holding period less than 12 months) on equity funds (investing over 65% in equity) are taxed at 15%. Meanwhile, long-term capital gains (holding period exceeding 12 months) above Rs. 1 lakh in a financial year are taxed at 10%. Debt funds (investing less than 65% in equity) are taxed at your applicable tax slab for short-term capital gains and at 20% with indexation benefit for long-term capital gains².

Making the Ultimate Choice

So, which path should you take? The answer depends on your investment objectives, risk tolerance.

Disclaimer: I am not a registered financial advisor with SEBI or any regulatory authority. The information provided on this blog is for educational and informational purposes only. It should not be considered as financial advice or a recommendation to make any investment decisions. Before making any investment, it is crucial to consult with a qualified financial advisor who can assess your specific financial situation and provide personalized guidance. Remember, investing involves risks, and past performance is not indicative of future results. The content on this blog should not be solely relied upon for making financial decisions. Always conduct thorough research and seek professional advice before investing. The responsibility for any investment decisions rests solely with the individual reader.