mutual fund vs FD

Mutual Fund vs FD. Which is a better asset to invest in for your child’s education?

Mutual Fund vs FD is a long-standing debate in the financial arena. While one offers fixed and stable returns, the other offers a chance at wealth generation. 

Fixed Deposits are the most popular and favoured investment mode among Indian households. And why not! It feels safe to have an investment that guarantees a risk-free return.

An FD allows you to put a lump-sum amount with the bank with a fixed interest rate and lay back for a good long period. Once the deposit matures, you can withdraw your money and enjoy the interest earned over the selected period. 

Mutual Funds enable you to pool your money and earn a return. Every Mutual Fund has a portfolio manager who invests your money into stocks according to your risk appetite and ROI. Therefore, the return on Mutual Funds depends on the market conditions. Unlike fixed deposits, it does not have a lock-in period.

Choosing the right investment journey for your child is the primary concern for every parent. If you are confused between Mutual Funds and Fixed Deposits, then look at both these investment options from various standpoints. 

Inflation-adjusted rate of return 

Inflation is the most crucial yet commonly ignored aspect of investment. It is the rate at which the value of your money decreases with time. Inflation reduces your purchasing power and creates financial instability. 

In India, FDs do not offer an inflation-adjusted rate of return. The maximum rate of interest on FDs is 5% to 7%. However, the inflation rate in recent years has been recorded somewhere between 4-6%

Inflation-adjusted return that you receive adds zero value to purchasing power. Instead, if the inflation rate goes higher than the interest rate, you will likely lose the money you have invested. 

On the other hand, Mutual Funds are highly responsive to the market conditions. Also, they come with the benefit of compounding on SIP investments. You can start with an amount as low as Rs. 500, and your money will grow every month. Mutual Funds, especially equity-based mutual funds, are influential enough to adjust the impact of inflation on your money. 

Risk Factor

Fixed deposits feel safe on the surface because they are government-regulated. But, when it comes down to investing in your child’s education, the risk against this safety goes scary. The need of the hour is to grow your money. FDs may keep your money safe but add nothing to growth. 

Mutual funds, however, allow you to mitigate the risk through portfolio diversification. You can identify your risk appetite and stash your money accordingly. Moreover, you have experts who guide you through your investment journey and help you attain your financial goals. 

Tax Implications

Tax payable on fixed deposits is subject to the Slab rate under the Income Tax Act, 1961, as amended from time to time. Also, the interest that you earn on FDs is tax-exempt under sec 80 TTB to the extent of Rs. 50,000

Whereas, Mutual Funds listed under Capital Gains are taxable. The tax rate would vary depending on the Mutual Fund and its income. The duration for which the Mutual Funds are held before the sale is significant for taxation purposes. 

mutual fund vs FD
Source: Freepik


Keeping the persistent trend of Education Inflation in mind, it isn’t wise to lock your money into Fixed Deposits. Once you make a choice, you can not withdraw until maturity. 

Mutual Funds come with no lock-in and are highly liquid. You can choose between a lump sum and a SIP investment. It enables you to start small but earn high market-based returns. You can take away your money at will!

Wealth Generation

With the pace at which the colleges are upscaling their fee structures, it has become challenging to keep up with the cost. Therefore, parents don’t just have to save but ensure wealth accumulation to pay for the price. 

Unfortunately, fixed deposits fail here. The ultimate return you receive from an FD would fall far below the level of return you need.

However,  if planned early and the right way, mutual funds are incredibly potent to help you reach your target. All you need to do is make the best out of the investment. Start early and extract the magic of compounding!

Parents need to look at the broader picture when choosing an asset for their child’s education. Due to their low Inflation-adjusted return, fixed deposits are likely to fail as productive assets. And, it doesn’t matter how safe FDs are if they don’t help you meet your desired goals. 

Mutual Funds offer you a safer opportunity to invest in stocks, especially if you don’t have the financial knowledge. Moreover, you don’t have to stress your pocket to invest. All you need is the magic of 3Ps: planning, patience, and persistence!

Consult an expert advisor to get the right plan for you

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