Fixed Deposit vs Mutual Funds: Which to Invest?

  • Fixed Deposit,Mutual Funds
  • 2 Years ago
Fixed Deposit vs Mutual Funds: Which to Invest?

  • What is a Fixed Deposit?
  • What are Mutual Funds?
  • Fixed Deposit Vs Mutual Funds - Know the Difference
  • Aim of Investing
  • Know Risk Appetite

Investments are made generally to maximise returns and minimise risks. However, there can be specific goals also for investing like stable monthly returns or wealth creation over the long term and so on. There are numerous investment options available in the market, and as an investor; you may be faced with the dilemma of choosing one product over another. So, what would you choose when it comes to mutual fund vs fixed deposits? Not sure? Read on to get a better idea.

What is a Fixed Deposit?

For a clear understanding of fixed deposit vs mutual fund discussion, it is essential to understand these products individually. A fixed deposit (FD) is an investment option where the investor parks a lump sum amount with a bank or an NBFC at a fixed rate of interest for a fixed tenure. FD interest rates may vary as per the tenure and also as per the lender policies. They are also called term deposits, and you could invest in fixed deposits for a term ranging from a few days to many years.

Fixed deposits can be cumulative or non-cumulative. In cumulative deposits, the interest keeps on accumulating, and you earn interest on interest. In non-cumulative deposits, the interest is paid to the investor at regular pre-specified intervals like monthly, quarterly or annually.

Shriram City Union Finance (SCUF) offers term deposits with the option of monthly, quarterly, half-yearly or annual interest payout. FD interest rates vary from 7.01% to 7.95% annually, and the term from 12 months to 60 months. So if you are looking at investing at best FD rates, you could choose to invest for 60 months. If you invest in a fixed deposit of Rs. 5000 for 5 years @ 7.95%, you would get a maturity amount of Rs. 7392 at the end of the term.

What is a Mutual Fund?

A mutual fund can be described as a common pool of funds where individual investors put in their respective contributions. These pooled funds are then invested as per a specific objective which is also the fund objective. For example, a technology fund will invest in securities of technology companies, and a debt fund will invest only in debt instruments like bonds, debentures, government securities and so on.

There are three types of MFs; debt, equity and balanced. Debt funds invest majorly in fixed return schemes like government and corporate bonds; equity funds will invest majorly in market-related instruments while balanced funds will combine both.

These funds are managed by professional managers and are traded on Net Asset Value (NAV). NAV is the market value of the securities held in the MF scheme. This is calculated by dividing the total value of all the securities under the MFby the total number of units of the scheme on a particular date.

So, if you 200 units of ABC Income Fund and the NAV of the fund is Rs. 100, the total value of your investment is Rs. 20,000.

Fixed Deposit vs Mutual Funds: Understand the Difference

Are you aware of the difference between mutual funds and fixed deposits? Understanding this will help you choose a product that suits your requirements best. Below is a table that will help in decoding FD vs MF difference.

Fixed Deposit vs Mutual Funds

Fixed Deposit Mutual Fund
FD interest rates are fixed, so the returns on them are also fixed. MFs are not on a fixed rate, so returns are not fixed and can vary.
Since FD interest rates do not change during the tenure, the return will be constant throughout the tenure of the deposit. No fixed rates, so returns can vary; sometimes they will be high and sometimes low or even negative
Returns are not linked to the market conditions. Returns are linked to market conditions.
There is no risk involved as the returns are fixed, and the principal invested is safe. There is risk involved when investing in MFs; the risk level may depend on the type of MF.
When you invest in fixed deposits, there are no costs involved. Investing in MFs involves certain expenses and costs.
Interest on FD is taxed depending on the slab that the investor falls in. MFs are taxed based on the holding period. Depending on the period, the investor could pay short-term or long-term capital gains tax
FDs can be used for tax saving under Section 80C; the lock-in period is 5 years. The equity-linked saving scheme can also help in tax saving; lock-in period is 3 years.

Which is Better, Fixed Deposit or Mutual Fund?

If you are wondering which is better, fixed deposit or mutual fund; then there is no black and white answer. When it comes to investing, each of you will have different requirements, goals and risk appetite.

Before deciding whether to invest in a fixed deposit or mutual fund, it is essential to focus on the following aspects:

  • What is your aim for investing? 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 a fixed deposit or mutual funds. If you want regular monthly returns, you could choose a fixed deposit with the monthly return option. The monthly FD scheme of SCUF with interest rates up to 7.95% could be a good option for investment for getting regular monthly pay-outs. The interest is paid out on the last day of every month by Shriram City Union Finance. However, Mutual funds could offer you a higher rate of returns but it is dependent on market conditions, adverse market conditions could result in negative return on your investment.
  • What is your risk appetite? As highlighted in the table above on the difference between mutual funds and fixed deposits, investing in mutual funds comes with certain inherent risks. So, if you are risk-averse, then it is better to invest in a fixed deposit. Even mutual funds that invest in debt funds cannot be risk-free. Generally, those in higher age brackets would like to invest in safe options, and those in the younger age group would be willing to take some risk in investing.

When investing, it should not be a decision that focuses on what is better, mutual fund vs fixed deposit aspect solely. A balanced portfolio should have a mix of products, so investing in the fixed deposit can stabilize it while mutual funds can help in diversifying as well as capital appreciation. So, you need to figure out how much you want to invest in fixed deposits and how much in a mutual fund. This is not something that is fixed and can change with the change in your goals or sometimes the market conditions too. Like in the current scenario, when there is a lot of volatility in the markets, investing in a fixed deposit may seem like a good option.

Fixed deposits or mutual funds both have their advantages and disadvantages. All banks and NBFCs offer term deposits and it is a hassle-free investment which can be done without any cost. Now deposits can be accessed online too. In case you need funds for an emergency, and you choose to sell your MFs, you could end up incurring a loss depending on market conditions, but your investment in an FD is always safe!


As we said, it is not FD vs MF but rather finding the perfect balance as per your requirements. Depending on your goals and risk appetite, you can find the right mix that suits you. Both the products can find a place in your portfolio owing to their specific advantages. Whether you choose to invest in a fixed deposit or mutual funds, it is important to be sure of the product features and all the fine print before investing. So what will choose fixed deposits or mutual funds or both?