FD vs Mutual Fund: Which One is Better for You?

Fixed deposits have been the ideal choice of investment for a majority of the average Indian household. RBI reported that almost 53% of households in India invest in bank FDs as financial assets.

In contrast, even though mutual funds have a history of being in India since 1963, it’s only grown in the past 20-25 years at a CAGR of 17%. Despite this, RBI reported that mutual funds only capture 7% of the Indian household investment option.

And since both of these investment options are a big deal in the country, we’ll discuss the difference between an FD and a mutual fund and which one you should invest in. Let’s see FD vs Mutual Fund.

What is a Fixed Deposit (FD)?

A fixed deposit (FD) is a financial product banks and other lending institutions offer. It is an investment option that involves depositing money for a certain period at an agreed interest rate. The time duration for the deposit depends on your financial investment portfolio and is usually either short-term or long-term.

However, remember that you cannot withdraw prematurely from your FD account without any financial penalties. Early withdrawals are possible in emergencies but only after the completion of penalties.

Then why should you create an FD if you cannot use it before its maturity?

Well, its main advantage includes higher returns compared to any type of savings account due to its locked-in interest rate – which means that the investor will receive the same amount of returns regardless of market conditions or inflationary pressures.

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What is a Mutual Fund?

A mutual fund is an investment vehicle that allows individuals and businesses to put their money together to invest. It allows investors to combine their resources, which are managed by a professional money manager. The fund invests in various bonds, stocks, real estate investments, and more.

They are categorised depending on the type of investments they contain. For example, bond funds, equity funds, and balanced funds have both equity and debt components. Investors can choose from various types of mutual funds based on their risk tolerance level and financial goals.

The major downside of a mutual fund is that investing in it involves risks associated with market volatility and fees associated with management expenses. Therefore, it is important to do thorough research before selecting the right mutual fund for your portfolio.

Difference Between FD and Mutual Fund

Both mutual fund and fixed deposit have their own pros and cons. Here are some of the main differences between the two:

FD vs Mutual Fund

Criteria Mutual Fund Fixed Deposit
Returns Linked to market performance Guaranteed
Risk High risk Low risk
Investment Lumpsum or monthly SIP Lumpsum
Lock-in Period Does not have one Has one, depending on whether you choose short-term or long-term
Liquidity High Medium
Expenses Fund management expenses Doesn’t carry any
Taxation Depends on the holding period and type of mutual fund Depends on your income tax slab
Premature Withdrawal Allowed with a tax load Has penalty
Who Should Invest Experienced investors with risk understanding Investors who want stability


Which is Better: Mutual Fund vs Fixed Deposit?

Both mutual funds and fixed deposits are two investment options with their sets of advantages and disadvantages. However, which one you choose will entirely depend on your investment stage.

If you are ready to take heavy risks and know the investment market like the back of your hand, then investing in a mutual fund is ideal. But invest in a fixed deposit if you search for something stable and low-risk.

A fixed deposit helps you get higher returns over a period of time since the market scenario does not affect the interest rates. If you’re ready to invest in a fixed deposit for higher returns, get started today with Freo Save!

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What will give you more return – FD or mutual funds?

The returns for mutual funds are subject to market risks. Therefore, to invest in one, you must study the market well and have a high-risk appetite. In contrast, a fixed deposit account is low-risk, where the market will not affect the interest rate on your returns and will give you assured returns.

Do mutual funds give interest?

No, you don’t get interest on your mutual funds. However, you get returns based on the fund’s performance in the market you have invested in.

Is mutual fund safe?

Investment options are never completely risk-free. Similarly, even mutual funds have high risk since they are linked to the market, and your returns are based on market volatility.

Is FD safer than mutual funds?

Compared to mutual funds, FDs are considered lower-risk investment options since they give out assured interest rates upon maturity. But that does not mean they are completely safe. An investor should know that an FD’s safety and liquidity depend on the financial institution’s solvency.

Which is better for emergency funds – FDs or mutual funds?

Both of the investment choices are good for creating emergency funds. The choice majorly depends on your risk-taking level. Liquid funds like debt mutual funds give you higher interest rates than fixed deposits.

Mutual funds or fixed deposits, which is better for a short-term investment?

Debt mutual funds are low-risk, but they do not generate stable returns. However, fixed deposits can guarantee you return at the decided interest rates. Fixed deposits are great as short-term investments if you want to save for a particular period and need a single transaction.

Can you break your FD to invest in mutual funds?

Breaking an FD before its tenure is not advisable, as it is likely to incur a loss in the form of a penalty charged by banks, usually amounting to 1% of the deposit amount. Unless you are certain that replacing the FDs with other investment avenues is a wise course of action, or if there is an emergency, withdrawal should be avoided.