Why is Debt Mutual Funds Better than Fixed Deposits?

fixed deposit vs mutual fund

People and experts have a different answers to the above question. Investors need clarification and sometimes need help deciding whether to invest in a fixed deposit or a mutual debt fund. Learning about both investment instruments and comparing them to make the right decision is better. It is necessary to gather relevant information about the few famous investment avenues before you finalize whether to invest in a fixed deposit or mutual debt fund. 

Introduction to fixed deposit and mutual fund

Debt Mutual Funds and Fixed Deposits are both worthwhile investment options preferred by investors in varied segments. The choice of investing depends on your investment needs. The information on the options will help you understand their features, pros, and cons better. Gather details about fixed deposit vs. mutual fund if you still decide to invest in an FD or mutual fund.

Because the interest rate on FD fell to a record low of 4 to 5%, several investors started looking for alternate options like debt schemes by mutual funds. Experts recommend retail investors avoid making any investment decision in a hurry as it can result in disappointment and loss in financial terms.

When comparing debt funds Vs. FD specifically risk, FDs are safer, so why not expand your knowledge or consult an expert for a fruitful investment decision? Remember that risk and reward go hand in hand. Information about the risks involved can make you plan better your financial goals, choose the right plan, and take maximum advantage of investing.

Debt Mutual Funds Vs. Fixed Deposits

Now let us look at the difference between Debt Mutual Funds and Fixed Deposits.


  • Debt Mutual Funds
  • Fixed Deposits

Minimum Investment

  • The average minimum investment is Rs. 5,000
  • The minimum investment allowed in an FD is Rs. 1000.

Investment Option

  • You can choose either a one-time investment or a SIP investment.
  • You have the option only to select a lump-sum investment.

Minimum Tenure

  • Investment in Debt Mutual Funds is allowed from 1 day (overnight funds) to 7+ years (long-duration funds)
  • The tenure in an FD is seven days to 10 years.

Approx Rate of Returns

  • 7%-9%
  • 6%-8%


  • Low to moderate
  • Low

Dividend Option

  • Yes
  • No


  • High
  • Low

Investment Expenditure

  • A nominal expense ratio is charged in the case of Debt Mutual Funds
  • No cost for FD management 

Premature withdrawal

  • Investors are allowed early withdrawal with or without exit load based on the mutual fund type. 
  • A penalty is levied upon early withdrawals.


  • Short-term gains of less than three years are taxed at respective tax slabs, while long-term gains (up to 3 years or more) on debt funds are taxed at 20% with indexation benefit.
  • The gain on a fixed deposit is taxable based on the applicable tax slab.

Choosing Debt Funds for Investing

A debt fund aims at providing investors with consistent returns throughout the investment period. Investing can be tax saving, capital appreciation, or parking money for short-term goals. So, choose to invest in either option considering your investing needs.

Debt funds, compared to equity, carry low risk and can be a better option. You can either manage your portfolio independently or hire a debt fund manager. Also, make sure you have a balanced portfolio. Check the eligibility, documentation, and other requirements to enjoy a hassle-free investing experience. 

More About Fixed Deposits

Let us know more about fixed deposits below:

Types of FDs Available

Fixed deposit accounts based on benefits, the purpose of account opening, and the account holder type can be classified into various categories. 

Below is a few Fixed deposit accounts type:

  • Regular FD Account
  • FD Account for Senior Citizens
  • Non-Resident Ordinary FD Account
  • Non-Resident External (NRE) Account
  • Corporate FD Account
  • FD Account with Monthly Pay-out
  • FD Account with Maturity Pay-out
  • Tax-Saving FD Account
  • FCNR FD Account

About FD Interest Rate and Banks

Here is the detailed interest paid by different financial institutions, including banks and NBFCs. The rate of interest paid to regular customers and senior citizens differs. Also, the payable interest rate is subject to change at any time. Hence, customers planning to go for a fixed deposit are advised to check the current rate of respective banks to avoid disappointment. 

Financial Institutions and FD Interest Rates

  • Bank Name
  1. Regular Customers (% p.a.)
  2. Senior Citizens (% p.a.)
  • ICICI Bank
  1. 3.00% – 6.35%
  2. 3.50% – 6.95%
  • SBI
  1. 3.00% – 6.10%
  2. 3.50% – 6.90%
  • Kotak Bank
  1. 2.75% – 6.30%
  2. 3.25% – 6.80%
  • IDBI Bank
  1. 3.00% – 6.25%
  2. 3.50% – 7.00%
  • Bank of Baroda
  1. 3.00% – 6.25%
  2. 3.50% – 6.75%
  • Indian Bank
  1. 2.80% – 6.30%
  2. 3.30% – 6.80%
  • Citibank
  1. 1.85% – 3.50%
  2. 2.35% – 7.25%
  • HDFC Bank
  1. 3.00% – 6.25%
  2. 3.50% – 7.00% 
  • IDFC First Bank
  1. 3.50% – 7.25%
  2. 4.00% – 7.75%
  • Indian Overseas Bank
  1. 3.60% – 6.40%
  2. 4.10% – 6.90%
  • PNB Housing Finance
  1. 6.80% – 7.40%
  2. 7.30% – 7.90%
  • Axis Bank
  1. 3.50% – 6.50%
  2. 3.50% – 7.25%
  • Punjab National Bank
  1. 3.50% – 6.10%
  2. 4.00% – 6.60%

The Documents Required to Open Your FD Account

Proof of Address

  • Passport
  • Aadhaar card
  • Bank statement with a cheque

Proof of Identity

  • Voter ID
  • Driver’s license
  • Passport
  • PAN card
  • Aadhaar card

Proof of Date of Birth

  • Aadhaar card
  • Voter ID
  • Service discharge certificate
  • PAN card

Impact of Inflation

No one can deny that inflation puts a dent in your pocket. Your savings and monthly budget also get affected because currency loses value. Fixed deposit offers a fixed interest rate, which is low compared to other investment options. Inflation has a direct and indirect impact on all investment instruments. It decreases the value of return payable on FDs, but debt mutual funds have the potential to hedge with inflation. 

If you must have invested your saving in an FD paying you annually 5% and the inflation rate is 4%, then the adjusted rate of return would be just 1%. On the other hand, your investment in Debt Funds may help you earn a higher rate of interest that may help you during times of inflation. 

Learning about how fixed deposit and mutual debt fund adapts to inflation can help you expand your knowledge. Experts advise investors to consider their risk appetite, investment needs, budget, tax slabs, and tenure.

Which investment should you consider for investment: FD or Debt Mutual Fund

For the more unassailable reason, you can choose to invest in bonds, FD, or Debt Mutual funds considering the fixed deposit vs. mutual fund comparison presented in the table. Both instruments have their importance and have their pros and cons. A fixed deposit is more suitable for a safe investment with minimal risk. Debt Mutual Fund is a good choice but carries certain risks.


FD return is not impacted by market conditions and can solve your need for an emergency fund and fulfill your short-term financial goals. The level of risk is a prime factor, and if you consider risk factors, FD, compared to mutual debt fund, is a preferred choice for risk-averse investors. Commence investing in either option after considering the essential elements that act as deciding factors.

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