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Fixed Deposits Vs Debt Mutual Fund: Which Is a Better Investment Option?

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September 2, 2022


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Fixed deposit vs debt mutual fund has been a contentious topic for every investor. When we compare a bank fixed deposit vs a debt mutual fund, we notice that there are many distinguishing factors such as their features, the time period of investments, risk factors and returns that differentiates them. This is why it is imperative to understand the differences between the two before investing in either.

Bank fixed deposits have been financial vehicles that have churned the wheels of most Indian households. On any windfall gains or a milestone year, investments were made in the form of fixed deposits. With the change in times and the financial environment, a lot of investment trends have changed.

Debt mutual funds, albeit not as widespread as equity mutual funds among ordinary investors have recently attracted increasing attention. Nevertheless, in terms of family financial assets, debt fund investments continue to account for a small part of fixed deposits. Let's take a look at the key differences between fixed deposits vs debt mutual funds investments so you can make an informed investment decision.

What Are The Differences Between Fixed Deposits Vs Debt Mutual Funds?

1. Risk factor:

Fixed deposit: Upon maturity of fixed deposits, both principle amount and interest are returned to the investor. Upon risk comparison of bank fixed deposit vs debt mutual funds, the bank provides capital protection, therefore fixed deposits are categorised as a risk-free investment. The fixed deposits may be forfeited if the bank's net value (assets minus liabilities) falls below zero as a result of huge NPAs (Non Performing Assets). Bank failures are uncommon, yet they do occur. If a bank collapses, investors' deposits (principle and interest) are guaranteed up to Rs 5 lakh, implying that you would get up to Rs 5 lakh even if the bank failed.

Debt mutual funds:  Debt funds are susceptible to market risks, and capital safety cannot be guaranteed. A debt fund faces two types of risk: interest rate risk and credit risk. The duration characteristics of debt funds influence interest rate risk. Debt funds that invest predominantly in money market instruments, for example, have lower interest rate risk, but gilt funds (those that invest mainly in government securities) with extended maturities have more interest rate risk. Credit risk is determined by the underlying securities' credit ratings. Investors should be aware of the risks and make appropriate investments.

2. Taxation:

Interest on fixed deposits is taxed both during and after the maturity of the investment. Every year, the fixed deposit interest is added to the taxpayer's income and taxed at the investor's tax slab. Each fiscal year, a TDS of 10% is imposed on FD interest over INR 10,000. 

Debt funds, on the other hand, provide a tax benefit over fixed deposits, particularly for investors in higher tax bands. Gains accrued in the short term in debt funds that are 36 months or less are taxed as per the investor’s tax slab.

Long-term capital gains in debt funds (investments held for more than 36 months) are taxed at 20% only after indexation is taken into account. When comparing bank fixed deposits vs debt mutual fund taxation, long-term capital gain taxation significantly benefits debt funds. 

3. Flexibility:

Debt funds outperform in the fixed deposits vs debt mutual fund argument because they provide greater flexibility. Rather than putting all of their eggs in one basket, debt funds diversify their holdings, lowering the risk of an asset failing in the overall portfolio. Furthermore, debt fund management has a lot more discretion when it comes to asset selection and allocation. They have the authority to change the portfolios' average ratings and maturity. 

4. Liquidity:

In comparison, both are fairly liquid and the funds can be accessed any time. However, depositors who intend to withdraw must break their fixed deposit and pay the penalty for doing so during the early withdrawal period.

In case of mutual funds, after a certain period, you are allowed to withdraw the funds. If you withdraw before the specified time, you will be charged a 1% exit load. You can redeem units for free after the exit load time. Some debt funds, such as overnight funds, do not charge an exit fee.

5. Expenses:

Mutual funds have charges that are deducted as part of the fund's management. Fixed deposits do not incur any fees throughout the beginning or duration of the deposit.

Fixed Deposits Vs Debt Mutual Funds: Which Is A Better Option?

In comparing fixed deposits vs debt mutual funds, there is no one right answer for the above-stated question. Everyone will have different requirements, goals and risk appetites when it comes to investing.

The aim of investing could range from capital appreciation to tax-saving or simply just parking your funds for some time. So depending on your aim, you could choose to invest in either of the instruments. If you want regular monthly returns, you could choose a fixed deposit with the monthly return option. However, mutual funds could offer more returns, which is dependent on the volatility of the market and may result in a loss of returns. 

The fundamental distinction between fixed deposits vs debt mutual funds is that mutual funds include some inherent risks. If your risk profile is averse to risk, then a fixed deposit is ideal for you. Those in the older age categories prefer to invest in safe choices, while those in the younger age brackets can take on some risks.

When deciding between fixed deposits vs debt mutual funds, the decision should not be based solely on which is superior. A well-balanced portfolio should contain a diverse range of assets; thus investing in fixed deposits can help to stabilise it, while mutual funds can help with diversification and capital appreciation. As a result, you must select how much to invest in fixed deposits and how much to invest in mutual funds.


If you value capital security and assured returns, a fixed deposit is your investment choice. However, when comparing fixed deposits vs debt mutual funds, investing a part of your fixed-income assets in debt mutual funds may produce potentially greater risk-adjusted returns while also providing tax benefits. It is not a matter of balancing fixed deposits vs debt mutual funds but of calculating the optimal balance for your unique circumstances. made simpler is the process of investing through the Fi Money app. The Fi Money app helps demystify money for you by helping you manage your finances better.

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Frequently Asked Questions

1. What is a good long-term investment, Fixed Deposits vs Debt Funds?

Investment decisions depend on risk appetite and investment goals. Investing in fixed deposits will give you an assured interest on the principle, and the complete investment is received by the investor post maturity. While debt funds offer more incentives in the long term, in terms of returns and tax benefits, it is still subject to market risk, so while you make more money than you would in a fixed deposit, there is still an element of risk.

2. What is the level of risk associated with debt funds?

Investing in debt funds has a variety of risks. Credit risk, interest rate risk, inflation risk, and reinvestment risk are among these dangers.

3. Who should invest in debt funds?

Investors who have a moderate to low risk appetite should consider investing in debt funds since the returns are moderate as compared to equity funds which riskier but offer higher returns.

4️. Is Debt Fund better than FD?

Debt mutual funds are preferred over fixed deposits for several reasons like the interest rates offered by debt MF are better than FD, the liquidity option is better than FD and debt mutual funds have investment options like SIPs or lumpsum unlike FD.

5. Is fixed deposit better than mutual fund?

Fixed deposit offers guaranteed returns with low risk, but the returns are usually lower than those offered by mutual funds. Mutual funds have the potential for higher returns, but also come with higher risk. It's important to consider your personal financial goals and risk tolerance before making a decision.

6. Which FD gives highest returns?

The highest returns on fixed deposits depend on several factors such as the bank or financial institution offering the FD, the tenure of the deposit, and the interest rate environment. Generally, FDs from private sector banks offer higher returns compared to those from public sector banks. It is also important to consider the stability and creditworthiness of the bank before investing in FDs. It is advisable to compare the interest rates offered by different banks and choose the one that offers the best return on your investment.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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