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Mutual Funds vs Fixed Deposit – Which is the Better Option?


  • Can’t decide where to invest - mutual funds or fixed deposits?
  • Decide based on your investment horizon, risk appetite and financial goals

Money lying in the savings account or received an unexpected cash flow? This leaves one thinking where to invest that money. “Wealth is created by investing and not saving”. If you just save and keep your money in the savings a/c, it yields you 3-4% which not even beats inflation. When we think of investing the first option, which comes to mind is opening a fixed deposit with the bank. It is considered a zero-risk, safe investment that yields a better return than the savings a/c. New investment options such as mutual funds and stocks have gained popularity and are considered as the go-to option these days.

Top Mutual Funds to Invest in Now

Are mutual funds better than fixed deposits or is it the other way round?

Mutual funds are supposed to be riskier than fixed deposits, are they?

Can I withdraw my money from mutual funds anytime?

Is my money safe in mutual funds like a fixed deposit in a bank?

These are some of the money questions that can arise in your mind when you are looking to invest. Let us compare mutual funds and fixed deposits on various parameters:

Returns – How much returns you generate from your investment is on the top of mind when investing. Fixed deposit returns are fixed & pre-decided i.e. when you open a fixed deposit with the bank, you know the return for the term you are investing. If the fixed deposit rate is 7.00% for 3 years, you are sure to get 7% after 3 years. Hence, fixed deposit returns are not MTM (marked to market) i.e. not dependent on daily price movements. On the other hand, mutual fund returns are not fixed or guaranteed, these are MTM (marked to market). The returns from equity mutual funds depend on the price movement of stocks in that mutual fund portfolio. Debt mutual funds, on the other hand, also do not offer fixed returns. Bonds in debt mutual fund portfolios are also MTM (marked to market.). Once can expect 5%-8% returns from different categories of debt funds and 12%-15% from different categories of equity mutual funds. This would also depend on the time horizon of investment.

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Withdrawal/Liquidity – Mutual Funds offer the benefit of liquidity, wherein you can withdraw your investments any time barring ELSS funds where the money is locked in for 3 years. When investing in fixed deposits, one cannot withdraw before the term of the fixed deposit ends, so if you open a fixed deposit for 5 years, you cannot withdraw for the next 5 years. If you intend to withdraw before the completion of the term of the fixed deposit, a penalty must be paid to the bank.

Risk – The risk in fixed deposits is lesser as compared to mutual funds but it is not zero. Many investors after the Yes Bank fiasco have found out that deposits can also be locked in for a period. As per RBI guidelines, only deposits up to INR 5 lakh are guaranteed by the bank. If you have fixed deposits of more than INR 5 lakh and the bank was to close abruptly, you might not get your money. Practically, this has never happened in India due to government intervention, but such a situation cannot be completely ruled out. Mutual funds, on the other hand, are prone to market risks since these are MTM instruments that have a risk of capital erosion. This happens when you invest without the right asset allocation and with wrong scheme selection. If one were to invest as per his/ her asset allocation, the risk in mutual funds is negligible. However, understanding various types of risks in mutual funds is important.

Taxation – Tax on fixed deposits is charged on the interest earned, the tax rate is as per the individual’s tax slab. In the case of mutual funds, the tax is in the form of capital gains – long term and short term. And, it depends on the holding period of the mutual fund investment.

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Costs – When you invest in mutual funds, there is a cost that ranges from 0.10%-2.25%, varying based on the type of mutual fund scheme. These costs are also called mutual fund expense ratios. To know more about mutual fund costs, you can read one of our earlier posts- In case of fixed deposits, there are no costs.

Key Takeaways

  • Mutual funds offer better returns than fixed deposits and can beat inflation over a long period of time.
  • Fixed deposits are less risky than mutual funds, however, if you invest with proper asset allocation, the risk in mutual funds is negligible.
  • Mutual funds offer diversification – one can make a portfolio of equity, debt, and gold funds, much unlike fixed deposits.
  • Mutual funds are managed by experienced professionals with expertise in managing money.
  • Withdrawal is more convenient in case of mutual funds than fixed deposits.

You can choose to invest in both basis factors such as your age, risk profile, time horizon and investment objective. We will recommend investing in mutual funds if you have a long-term time horizon and aspire for better returns. Equity mutual funds are ideal in that case. If you are risk-averse, you can invest in a mix of debt funds and fixed deposits. To generate a real return on your money, it is important to beat inflation over a long period of time which is possible through mutual funds.

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