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Mutual funds or FD: Which is Better for a Ten-Year Investment?

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August 12, 2022


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If I ask my parents, which is best, FD or mutual fund, their obvious answer will be FD. They come from an era when FD was a popular instrument that offered both securing your savings in a bank and growing your savings at attractive rates. On the other hand, mutual funds would be risky because it's linked to the market — so there is no guarantee that you'll get your savings back.

Times have changed now. With more financial literacy among new investors, FDs have taken a back seat, while mutual funds have become a more popular investment avenue despite their risk. Let's delve further to understand each of them.

Mutual Funds vs FDs – A Brief Overview

Fixed deposits (or FDs) are one of the most popular investment choices for Indians. In fact, as per RBI's research, 52% of average households' financial assets were invested in fixed deposits in banks. 

On the other hand, mutual funds came into the Indian markets in the 1960s! However, they only gained popularity in the past two and a half decades. This is evident from the fact that this industry crossed a whopping ten crore folios in May 2021, as per data published by the Association of Mutual Funds in India.

Although there's been a massive pace of growth in this arena, RBI's research indicates that mutual funds account for only 7% of householding savings.

Defining Fixed Deposits 

Fixed deposits provide investors with fixed interest rates over fixed tenures. These tenures stem anywhere from a period of 7 days to 10 years. Given that interest on bank fixed deposits gets compounded, interest is added to accrued interest, making it a profitable venture. 

To understand this better, consider bank XYZ, which pays 6% interest on a 4-year fixed deposit; compounded annually. Should you deposit INR 100, you will have INR 106 in your account after a single year. By the end of the second year, a 6% interest will apply to the principal and its interest. This means that 6% will apply to INR 106, and this accumulation will continue for the 4-year tenure. 

There's been a gradual decline in interest rates applicable to fixed deposits in the past 2.5 decades. The COVID pandemic, for instance, saw the RBI reduce interest rates aggressively, which meant banks also decreased interest rates on fixed deposits. Examine current taxation norms, and you'll notice that fixed deposit interest rates can barely beat inflation. 

It is important to note that as the interest rate applicable to fixed deposits is fixed throughout the tenure of the deposit, no indexation benefit during taxation applies. It lies in contrast to mutual funds. This means there's no protection from inflation, especially with fixed deposit interest rates being particularly low.

Understanding Mutual Funds

Mutual funds are financial instruments that pool money from several investors. The cash then gets directed toward assets. These funds are supervised and managed by asset management companies. Investing in a mutual fund gives you access to a diversified portfolio of stocks or bonds. Investors can choose to invest in varied mutual fund holdings keeping their financial goals in mind. 

While equity mutual funds primarily direct money toward the stock market, debt mutual funds direct money toward bond and money markets. Further, while equity mutual funds wish for capital to appreciate, debt funds focus on generating an income.

One of the key benefits of mutual funds that lands them at a top spot in the mutual fund vs fixed deposit argument is taxation. These funds serve as some of the most tax-efficient investments. While short-term capital gains (i.e., < 12 months) applicable to equity funds amount to 15%, long-term capital gains (i.e., < 12 months) applicable amount to 10%. In fact, long-term capital gains falling under INR 1 lakh are exempt from taxation. 

When looking at debt funds, short-term capital gains are taxed, keeping in mind an investor’s tax slab. In contrast, long-term capital gains are taxed at 20% once indexation benefits are considered. FDs are taxed based on your tax slab. So if you fall in the highest tax bracket, you may be at a disadvantage. Further, if the interest amount exceeds ₹10,000 in a financial year, then TDS of 10% will also be deducted. This helps highlight how mutual funds are superior to fixed deposits. 

Exploring the Safety Levels of Fixed Deposits and Mutual Funds

Fixed Deposits

The following reasons help highlight why fixed deposits have traditionally been viewed as 'safer' than mutual funds for 10-year investments.

Portfolio Diversification – Banks have diversified portfolios owing to the following reasons. 

  • They lend money to retail customers in addition to businesses
  • Banks offer a wide range of loans ranging from personal loans to vehicular loans to maximise their client base 
  • There exist millions of customers that banks serve, which lies in contrast to the 25 to 100 companies that equity funds invest in

Insurance Applicable – The DICGC (Deposit Insurance and Credit Guarantee Corporation) is a RBI subsidiary that overlooks deposit insurance in cases of bank insolvency. It gives deposits a maximum insurance cover of Rs 5 lakh on their deposits across savings accounts, current accounts, Fixed Deposits and Recurring Deposits. . 

Mutual Funds

Mutual funds are tethered to the following risks; however, you must understand the likelihood of them actually arising.

Credit Risk - if you choose to invest in large-cap mutual funds, your money will be directed towards investments in the country’s top 20-50 listed companies. Since the Indian economy is majorly dependent on these companies, the chances of them defaulting simultaneously and resulting in your investments losing value is slim. 

Market Risk – Although mutual funds are subject to market risks, if you remain invested in them for at least ten years, the chances of your encountering negative returns are unlikely. To understand this better, consider that the past 20 years have seen an average compound annual growth rate (or CAGR) equal to 12.3%, along with a minimum CAGR equalling 5.5% across a ten-year investment period. This 5.5% figure is, in fact, almost at par with current fixed deposit rates.

Tabulating Differences Between Fixed Deposits and Mutual Funds 

The table provided below helps highlight the more crucial differences between fixed and mutual funds.

Area of Consideration

Mutual Funds

Fixed Deposits


These funds are subject to market risks. Different schemes carry different risk profiles, and investors are encouraged to invest, keeping their risk thresholds.

These are very safe investments; however, this safety level ultimately depends upon the bank.

Protection Authority for Investors

The Securities and Exchange Board of India (or SEBI) regulates mutual funds in India.

The Reserve Bank of India (or RBI) regulates fixed deposits in India.


Here, there is a long-term capital gains tax benefit. If you compare a debt mutual fund with a fixed deposit, the indexation benefits of debt funds make them more tax-friendly for investors who fall under higher income tax slabs. 

The taxation policies relate to the income tax slab an investor falls under.


Returns here are linked to the markets. That said, the historical returns of top-performing funds across varied categories is strong.

Fixed deposits have assured returns tethered to them.


There is a high level of liquidity linked to open-ended mutual funds. An exit load might apply to withdrawals made within a certain time frame from the date you first invested in a fund.

There is a medium-to-high level of liquidity linked to fixed deposits. That said, if you make premature withdrawals, you incur penalties.

Final Thoughts

Mutual funds vs fixed deposits is an age-old debate. Both are linked to their own set of pros and cons. Consider the factors mentioned above while making a final investment decision. While fixed deposits are more secure than mutual funds, the price attached to this security is high, making the returns considerably low. 

Invest Via Fi In Mutual Funds 

Mutual Fund investments on Fi are simple & commission-free. With its intuitive user interface, suited for new & seasoned investors, one can select from over 900 direct Mutual Funds. Plus, Fi is 100% secure as it functions under the guidance of epiFi Wealth, a SEBI-registered investment advisor. To help simplify the steps involved, you can invest daily, weekly, or monthly via automatic payments or SIPs — created with one tap. Moreover, Fi offers 100% flexibility with zero penalties for missed payments.

Frequently Asked Questions

 Q1. Which is better, FD or SIP? 

A1. Systematic investment plans (or SIPs) are ordinarily viewed as superior investments as they are diversified, provide tax benefits, are flexible and are associated with greater returns. That said, you must only choose them over a fixed deposit if they align with your investor profile.

Q2. Can I invest in an FD every month? 

A2. A fixed deposit is a one-time investment; therefore, monthly deposits aren’t allowed. You can check out the JARS feature by Fi Money if you’re looking to make deposits every month.

Mutual funds or FD: Which is Better for a Ten-Year Investment?

A3. As of FY 2022-2023, some of the best mutual funds that provide monthly payments include the following.

  • Aditya Birla Sun Life Regular Savings Fund
  • Baroda Pioneer Conservative Hybrid Fund
  • DSP BlackRock Regular Savings Fund
  • ICICI Prudential MIP 25


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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