• English
  • Hindi
  • Bengali
  • Marathi
  • Telugu
  • Tamil
  • Gujarati
  • Kannada
  • Odia
  • Malayalam
  • Punjabi

Mutual fund vs fixed deposit: Differences you should know


by Mahindra Finance


February 7, 2024


6 mins read

Are you wondering where to park your hard-earned savings? Fixed Deposits (FDs) and Mutual Funds (MFs) are two prominent choices for you in the investment arena, and understanding the nuances of FD vs mutual funds can help you make an intelligent decision.

While both offer unique advantages, the difference between mutual funds and FD is a crucial factor when planning investment diversification.

On one hand, fixed deposits offer guaranteed returns and capital protection, shielding your investment from market fluctuations and offering peace of mind for risk-averse individuals.

Mutual funds, on the other hand, unlock the doors to potentially higher returns, but they also carry the inherent risk of market volatility. Let’s discover if you should go for fixed deposit or mutual funds.

In this guide, we will compare FDs and mutual funds to help you make an informed decision about where to invest your money. Let's explore the difference between FDs and mutual funds and understand which option suits your needs better.

FD vs mutual fund: An overview

The choice between fixed deposits and mutual funds, often framed as FD vs mutual funds, depends on key distinctions. FDs provide a fixed interest rate, guaranteeing returns. They are also low-risk investments with no expense ratio, suitable for risk-averse individuals seeking capital protection.

On the other hand, mutual funds entail a certain level of risk depending on the type chosen but provide exposure to various asset classes and professional fund management expertise. Understanding the nuances of mutual funds vs fixed deposits is necessary to make an informed decision about where to invest your hard-earned money.

Knowing the difference between mutual funds and FD helps you decide how much you can safely invest in these two options.

What is a fixed deposit?

A fixed deposit (FD) is a financial instrument provided by banks or Non-Banking Financial Companies (NBFCs). FD rate of interest is higher as compared to traditional savings accounts. Mutual fund vs fixed deposit choices involve contrasting features.

While FDs promise capital protection and a guaranteed return due to their fixed interest rate, investors must keep their funds locked in for a specific period agreed upon at the time of investment. This tenure can range from 7 days to 10 years, offering flexibility based on individual preferences.

Fixed deposits are regulated by the Reserve Bank of India (RBI), ensuring secure investments for individuals looking for stable returns.

What are mutual funds?

Mutual funds pool money from multiple investors to create a diversified portfolio of stocks, bonds, and other securities, introducing a dynamic aspect in the context of mutual fund vs fixed deposit choices.

These pooled investments are managed by skilled fund managers who have extensive knowledge of financial instruments and the mutual funds industry. The Securities and Exchange Board of India (SEBI) regulates mutual funds to protect the interests of investors.

Benefits of investing in fixed deposit and mutual funds

Investing in fixed deposits or mutual funds has its respective benefits. Here are a few of them:

Fixed Deposits (FDs)

Guaranteed Returns: FDs provide a fixed interest rate that remains constant throughout the predetermined tenure.

Low Risk: FDs are low-risk investments with no expense ratio or market volatility to worry about.

High Liquidity: FDs offer high liquidity as they can be prematurely withdrawn if needed, subject to certain penalties

Capital Protection: FDs promise capital protection with assured returns upon maturity.

Mutual Funds (MFs)

Professional Management: Skilled fund managers make informed investment decisions to maximize returns.

Diversification: Mutual funds invest in a diversified portfolio across different asset classes, reducing risk.

Access to Various Asset Classes: MFs provide exposure to stocks, bonds, commodities, and more for diversification.

Potential for Higher Returns: The market-linked performance of mutual funds has the potential to generate attractive long-term returns.

Difference between Fixed Deposit and Mutual Funds

Should you choose fixed deposit or mutual funds? The following comparison table highlights key differences between the two choices: 

Factors               Fixed Deposits (FDs)Mutual Funds (MFs)
Returns              Fixed interest rate                          Market-linked performance
RiskNo risk Low to high, depending on the type
ExpenseNo expenseEntail an expense ratio
LiquidityHighGenerally high
Investment AmountSpecified minimum amount;
often no maximum amount
Specified minimum amount;
often no maximum amount
TenureFrom 7 days to 10 years Often no fixed tenure;
it depends on the investor’s preference
TaxationTaxable as per the criteriaTaxable as per the criteria
Fund ManagementNo fund manager is requiredRequires a fund manager
Flexibility Low, subject to a penalty High, various types of schemes are available
Regulating authorityReserve Bank of India (RBI)Securities and Exchange Board of India (SEBI)

FD vs mutual funds: Which is better?

By now, you understand the difference between FD and mutual funds. The choice between them depends on individual preferences. If you prefer guaranteed returns with low risk and capital protection, FDs are a suitable option.

However, if you seek market-linked performance, professional management, diversification across asset classes, and the potential for higher returns over time, mutual funds may be a better choice.

It's crucial to evaluate your investment objectives, risk tolerance, and financial goals before making a decision.

Wrapping up

Fixed deposits (FDs) and mutual funds (MFs) are two distinct investment options with their characteristics and benefits. To key difference between FDs and mutual funds is that FDs offer guaranteed returns and capital protection, while MFs provide market-linked performance and potential for higher returns.

The choice between the two depends on individual preferences, risk appetite, and financial goals. It's important to carefully evaluate your needs and consult experts if necessary.


1. Can I withdraw money from a fixed deposit before maturity?

Yes, premature withdrawal is possible from fixed deposits subject to certain penalties based on the terms and conditions of the specific scheme.

2. How are mutual funds taxed in India?

Mutual funds are subject to taxation based on factors such as the type of mutual fund, duration of investment, and applicable tax laws. Please consult a tax advisor or refer to the latest tax regulations for detailed information.

3. Do mutual funds guarantee returns like fixed deposits?

No, mutual funds do not guarantee returns like fixed deposits since their performance is linked to the market fluctuations of various securities in the portfolio.

4. Is it possible to lose money in a mutual fund investment?

Yes, there is a potential risk of losing money in a mutual fund investment due to market volatility or poor performance of securities held by the fund.

5. Are there any penalties for early withdrawal from mutual funds?

Mutual funds generally do not have penalties for early withdrawals. However, certain schemes may have exit loads applicable for specific periods.

Related articles

How To Save Tax On FD Interest?

Are you looking for ways to save tax on FD interest? You’re not alone. Many individuals are eager to reduce their tax liabilities and maximise their savings. In this guide, we will explore pract...


March 5, 2024

What Are The Tax Exemptions On Fixed Deposits? 

Fixed deposits (FDs) are a popular investment option for individuals looking for a secure and stable way to grow their savings. Apart from offering attractive interest rates, fixed deposits also provi...


February 5, 2024

How To Open A Fixed Deposit Account Online

If you are looking to save some money for your future use, you could create an FD account. An FD or fixed deposit is a type of savings instrument that allows you to save a fixed amount of money for a ...


June 30, 2023