Debt Mutual Fund Schemes V/S Fixed Deposits: Which one best for investment?

Mutual funds and fixed deposits are both highly popular as investment options in India. Each of these is meant to play a different role in your investment portfolio and you should make your choice based on your investment strategy. Remember that your investment portfolio must contain various types of investment instruments to reduce exposure to risk. Listed below are the key features that you should keep in mind when making your choice.


The returns generated by mutual funds, including debt funds, are linked to market behavior. Remember that you underlying your debt mutual fund are different debt instruments – and they do carry a risk of default.

Fixed deposits, on the other hand, offer a fixed and guaranteed return. As both the tenure and the interest rate are fixed for a fixed deposit, it carries no market risk. Check out the highest interest rates on FD offered by PNB Housing here.


In theory, your investment in a debt mutual fund carries the risk of default. Though in a practical sense, the risk is very limited as the regulations introduced by SEBI require the investments to be made only in securities that carry a high rating.

FDs, on the other hand, virtually carry no risk. The returns are not just guaranteed but some may even be backed by a sovereign guarantee. The low risk also means that the interest offered is not as high as the potential earnings from debt mutual fund.


Not all the monies that you use to purchase a debt mutual fund will get invested in the underlying investment instruments. It would also go towards the fee for managing the fund and other charges involved. Investment in fixed deposit (FD) does not attract any such fees either at onset or during the tenure of the deposit.


Most debt mutual funds have a short lock-in period during which an exit load is to be borne on withdrawal. Once this period is elapsed, you can withdraw your monies without paying any fees. Typically, the exit load is 1%.

If you wish to withdraw your fixed deposit before the tenure is completed, you will have to pay a penalty on the interest earned.

Tax treatment

Earnings from mutual funds are subject to capital gains tax. Debt funds attract an LTCG tax of 20% post indexation. This is generally lower than the tax on FD interest 2019.

The interest earned on fixed deposits is considered a part of your annual income and is taxed based on the income tax slab you fall under. A TDS of 10% is deducted if the interest earned is higher than ₹10,000 a year. You can avoid this by either choosing to invest in a tax-saving fixed deposit or presenting a form 15H or 15G.

Unless you are highly risk-averse or have already reached your financial goals, debt mutual funds are a better option compared to fixed deposits. On the other hand, the simplicity of operation and easy to understand the nature of fixed deposits can make them an ideal choice for some.

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