debt mutual funds vs FD

Debt Mutual Funds Vs FD. All you need to know

There is an ongoing debate on the topic of debt mutual funds vs FD to determine which is the better savings option.

The normal mentality of a common person has been to invest in FDs as it is convenient and safe with fixed returns, but with time the thought process has shifted in favor of debt mutual funds as they offer good returns compared to FDs. 

Let us discuss the topic in detail depending on different parameters to understand the best possible option from the investor’s viewpoint.

Differences between debt mutual funds vs FD

1. Capital protection

In terms of capital protection FDs have an advantage over debt mutual funds.

According to the RBI directive, a bank depositor has a protection cover of a maximum of 5 lakh for both principal and interest in case the bank fails.

If the depositor has FDs in different banks, then the protection cover will apply to all the banks separately. 

Debt funds do not include capital protection as the investors are faced with credit risk and interest rate risk. 

2. Safest Instruments

FDs are the safest instruments for investible surplus as they are protected by RBI guidelines.

In contrast, debt mutual funds are subjected to market risk as the underlying securities are exposed to market fluctuations and capital erosion. 

3. Interest rates and returns

The interest rates of FDs remain fixed until their maturity date, irrespective of any changes in the rate over that period. The expected return of the investment thus remains the same as before.

Suppose an investor has opened an FD for two years at 6% per annum, then the rate will remain fixed throughout the whole tenure even if the bank has increased or decreased the rate in the interim period, and they will be paid the same amount of money which was calculated at the start of the investment. 

In the case of debt mutual funds, the returns depend on interest income and capital gains from the underlying securities. 

debt mutual funds vs FDs

4. Rate of returns

 In the case of debt mutual funds vs FDs, the estimated rate of returns for debt mutual funds is generally 7% – 9% and for FDs is an estimated 5% to 8%.

Although FDs have a fixed return and debt, mutual funds do not come with assured returns. 

5. Short-term holding period

The average rate of return of FDs is considered better than that of debt funds in the short haul as the former manages to outperform the latter. 

6. Long-term holding period

When the holding period is long-term, then it is better to invest in debt mutual funds than FDs.

Even if the interest rates do not fall within that period, the corporate bond funds would easily beat the FDs in the same period. 

7. Inflation-adjusted returns

In debt mutual funds vs FDs, the FDs usually have low inflation-adjusted returns, whereas the debt mutual funds show potential for high inflation-adjusted returns. 

8. Dividend option

There is no dividend option on FDs, whereas the answer is yes for debt mutual funds. 

9. Taxation

The taxation on debt mutual funds is lower than the fixed deposits. Despite the TDS deductions by the bank, the interest income from FDs is included in annual income and taxed according to a person’s tax slab. 

In debt funds, the returns on investment within 3 years are treated as short-term capital gains. It is included in annual income and taxed according to the individual’s tax slab.

The returns on investments after three years are treated as long-term capital gains and are taxed at 20% with indexation benefits. 

10. Premature withdrawal

In debt mutual funds, premature withdrawal is allowed with exit load/no load, whereas in FDs, it is allowed with a penalty. 

Banks generally levy a penalty of 1% on premature withdrawal of FDs, and the amount is deducted from the effective rate of interest.

In debt funds, except for the fixed maturity plan, which restricts redemption, all the other funds are allowed withdrawal by paying a minimum amount of exit load. 

11. Cost of investment

The banks do not charge a fee for opening or maintaining an FD account.

On the other hand, mutual fund houses charge multiple fees like commissions, management fees, legal fees, etc., for operating the debt funds. 


If you want to know who is the winner in debt mutual funds vs FDs, then both have advantages and disadvantages.

FDs have the upper hand in terms of capital protection, safe investments, income certainty, and investment cost compared to debt mutual funds.

In comparison, debt mutual funds are better options in terms of premature withdrawal, dividend options, long-term investments, taxation, and rate of return.

Consult an expert advisor to get the right plan

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