Mutual Funds Vs Fixed Deposits - Where to Invest?

Mutual Funds Vs Fixed Deposits - Where to Invest?

When it comes to saving money, people often opt for fixed deposits, considering them to be relatively risk free.  The security of having the money in the bank is apparently a great factor. But we need to introspect that is this actually saving of money or rather losing of it?

Fixed deposits of FDs may give attractive returns on paper, but with the tax payable at the current tax slab, the more one invests in FDs, the more tax one has to pay. Taking in consideration the rate of inflation over the years, it is possible that one may actually be facing a loss by investing in FDs. In the case of Mutual Funds or MFs, the scenario is a wee bit different.. Although MFs are affected by market volatility and do have a level of risk, they are managed by professional fund managers, who do their best  not only to protect investments but also to grow it.

When it comes to rate of returns, FD rates are pre-specified and do not change for the entire tenure. On the other hand MF rates are affected by market conditions, hence during positive market conditions; MFs have the potential to earn high returns where as FD rates are unaffected.

 In terms of risk, FDs are generally known for minimal risk ,where as equity mutual funds carry high market risk , and debt mutual funds carry lower market risk than equity. But can be mitigated to a certain extent as mutual funds are managed by professionals. Yet,Mutual funds are prone to market risk, but as it is said ,big risks give bigger returns.

Fixed deposits  have a fixed time period and have low liquidity till its maturity period. In case of mutual funds most of the funds have high liquidity on the condition that minimum holding period has passed and subject to lock in period  as applicable .In case of Fixed deposits premature withdrawals FD holders have to pay a penalty and miss out  on a portion of the expected returns. Mutual funds only charge you an exit load if investments are withdrawn in a very short period usually  within a year . Mutual funds schemes provides high liquidity , whenever you are in need of funds you can redeem mutual fund.

A crucial factor to be considered before choosing between FDs and MFs should be the tax status.  When it comes to FDs, tax levied depends on your current tax slab, irrespective of the tenure of the fixed deposit. Instead the tax status of MFs depends on its category. Equity funds held for long term (more than a year) are not taxable. Short term equity funds are taxable at 15%. Long term debt fund gains are taxable at 20% with indexation and 10% without indexation and short term capital gains are taxable according to investor’s  tax slab. Hence we can say that MFs are tax friendly compared to FDs. Especially gains on long term equity funds, which are not taxable at all. 

In the end, the decision to invest between a FD and a MF is based on the risk capacity, and the horizon of the individual. But when the things are hopeful, and there are good prospects for growth of the economy, it makes greater sense to invest in MF, because of the possibility of returns.   

Note-: The comparison of Mutual Fund Vs FD has been given for the purpose of the general information only. Investment in Mutual Fund Schemes carry high risk and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. Birla Sun Life Mutual Fund / Birla Sun Life Asset Management Company Limited will not accept any liability/ responsibility/loss incurred on any investment decision taken on the basis of this information.


Mutual Fund Investment Information.   Is Mutual Fund a good option.   How to start investing in mutual fund.