FD vs Debt Funds: Key Differences

Quick Summary:

• A fixed deposit is a fixed income instrument while a debt fund invests in different fixed income instruments. While both fixed deposits and debt funds are considered to be relatively safer ways to invest, they are different and suit different financial goals
• Fixed deposits offer stable and predictable returns with lower risks compared to debt funds that can offer higher returns corresponding to the risks associated with the underlying investments.
• Fixed deposits come with a fixed tenure and a predetermined return, while debt funds can offer more liquidity. Debt funds can be redeemed anytime, sometimes with an exit load
• Both FDs and debt funds are taxed under the tax slab rate of the individual. FDs attract 10% TDS if annual interest exceeds ₹50,000 for resident Indians, while the limit is enhanced to ₹1,00,000 for senior citizens for FY 2025-26

Fixed deposits and debt funds (also referred to as debt mutual funds) are two popular options for investors to park their monies. Although both FDs and debt mutual funds are considered relatively safer investment options that offer stable returns, they have several differences. 

FDs are viewed as safe and straightforward, offering fixed and predefined returns. Debt funds, on the other hand, provide potentially higher returns, but they also involve a little more risk. Both serve different needs in a financial portfolio. The right choice depends on your goals, time horizon, and risk appetite.

In this article, we’ll break down FD vs Debt Funds in detail: What they are, their benefits, how they differ, and how you can decide which one is right for you.

What is a Fixed Deposit (FD)?

A Fixed Deposit (FD) is one of the oldest and most trusted investment options in India. Offered by banks, post offices, and NBFCs (Non-Banking Financial Companies), it involves depositing a lump sum for a fixed period at a pre-decided interest rate. Fixed deposits offer varied interest rates based on their safety/credit ratings, flexible payout options, and multiple tenure choices.

There are two popular types of fixed deposits in India: Cumulative and non-cumulative. In cumulative FDs, the principal amount, along with the interest, is paid out at maturity. However, in non-cumulative fixed deposits, the interest is paid out to the investor at specified interim periods, such as monthly, quarterly, or annually.

The tenure of FD usually ranges from 7 days to 10 years or more, giving you the flexibility to choose a duration that suits your preference. The interest rates typically range between 2.5% and 8.5% per annum, depending on the chosen tenure for investment and the financial institution, like a bank or NBFC.

In most Indian households, fixed deposits are popular. That's because FDs let you plan your future financial goals with an assured return. As the returns are not market-linked, they are predefined. However, the interest earned is subject to taxation according to the tax slab of the account holder.

Benefits of Fixed Deposits

Some of the striking benefits of fixed deposits are:

Assured Returns

Fixed Deposits offer assured returns. In FY25-26, the annual interest rates offered by many leading banks and NBFCs are between 6%-8.4% which remains unchanged after the money is deposited. So, you can easily calculate assured returns over time.

Note: The interest rates may vary from time to time as per RBI policy for rate change and internal policy of the financial institution. Usually, senior citizens are offered a slightly higher interest rate of 0.25% or so.

Insured Up To ₹5 Lakh

The DICGC (Deposit Insurance and Credit Guarantee Corporation) insures your bank fixed deposit amount, including interest, up to ₹5 lakhs under the guidance of the Reserve Bank of India(RBI). So, in the event of failure of the bank or a financial mishap, your FD will be secured up to ₹5 lakh per individual.

Flexibility of Returns

You have the freedom to pick a tenure as per your preference. Depending on the FD tenure you choose, you can receive the interest earned on a monthly, quarterly, annual basis, or upon the maturity of the scheme, as selected.

Loan Benefits:

In case of an emergency, you may borrow up to 80-90% of the principal amount of your FD. So, this is the easiest way to access your funds without breaking your deposit.

Tip: This might come in handy if there is a temporary requirement or in a falling interest rate scenario.

Compound Interest Benefit

When it comes to cumulative fixed deposits, the interest is added to the principal amount, and the next interest is accrued upon this total amount. Thus, you can benefit from the power of compounding, which can be seen in the overall returns upon maturity.

Emergency Withdrawals

In times of emergencies, you have the option to make an early withdrawal. Most banks and financial institutions, however, could add a small charge for premature withdrawal.

Tip: Even if there is a slight premature withdrawal charge, some FDs can generally be liquidated into your bank account within minutes depending upon the FD provider(Bank or NBFC) and serve as a true “emergency” access fund!

What is a Debt Mutual Fund?

A Debt Mutual Fund is a type of mutual fund that invests in short and long-term fixed-income securities such as government or corporate bonds, treasury bills, certificates of deposit, commercial papers, etc. There are various types of debt mutual funds that primarily invest in bonds or other debt securities based on the scheme’s investment objectives. The goal of debt mutual funds is to preserve the capital and generate income for its clients.

However, returns offered by debt mutual funds are tied to the debt market's performance, including interest rate fluctuations and the credit quality of its underlying securities.

Suggested Read: What is Floating Rate Fixed Deposit?

Benefits of Debt Mutual Funds

Here are some of the most common benefits of investing in a debt mutual fund:

Potential for higher returns:

In certain market cycles, debt mutual funds have the potential to outperform FDs. 

Although the returns on debt mutual funds are not guaranteed, they are relatively more stable than other asset classes.

Liquidity:

Most debt mutual funds can be withdrawn anytime without any or little exit load. However, the money takes 1 or 2 days to be credited into your bank account.

Tip: It's like parking your funds without the limitation of premature penalties. However, keep in mind that redeeming the funds may come with an exit load, depending on the type of debt funds you have invested in.

Diversification:

Since debt mutual funds provide an option to spread the risks across various fixed-income instruments, the investment is spread across multiple products, thereby reducing the reliance on one instrument. This helps to diversify your debt portfolio.

Professional Management

Debt funds are managed by professional fund managers. These fund managers are backed by research teams and invest based on the scheme's objective.

Fixed Deposits vs Debt Funds – Key Differences

Thus, both FDs and debt mutual funds are generally considered to be low-risk, conservative investment instruments.

How to Choose the Right Investment for You?

One of the important questions is ‘which is better, FDs or debt mutual funds?’ To answer this question, you need to understand your financial goals, investment horizon and risk appetite. If you prioritise capital safety, and want stable and predictable returns, fixed deposits could be the right choice for you. Fixed deposits are also a smart choice if you have a planned financial requirement in the near future/short term.

If you are comfortable with slightly higher risk (but not at the same level as equities) for better returns than FDs, you can choose debt mutual funds. In an ideal financial portfolio, both of these investment instruments would co-exist as they serve different purposes.

Why is Mahindra Finance the Right Choice for Your Investment Needs?

When it comes to investing your hard-earned money, choosing a financial institution that combines safety, attractive returns, and flexibility is paramount. Mahindra Finance stands out as an exceptional choice for your fixed deposit investments, offering multiple advantages such as:

Unparalleled Safety and Trust

Your investments are secured by the highest safety ratings in the industry. With "IND AAA/Stable" from India Ratings and "CRISIL AAA/Stable" ratings, Mahindra Finance Fixed Deposits offer the lowest credit risk and highest level of safety, ensuring confident and timely servicing of all financial obligations.

Superior Returns for Every Investor

Mahindra Finance delivers competitive interest rates that often exceed those offered by traditional commercial banks. Regular investors can earn up to 7% annually depending on tenure, while senior citizens enjoy an additional 0.25% interest rate bonus, maximizing returns across all investor categories.

Flexible Investment Solutions Tailored to Your Goals

Whether you're planning for short-term needs or long-term wealth creation, our FD schemes accommodate diverse financial objectives. Start investing with just ₹5,000, choose flexible tenures from 12 to 60 months, and select from multiple interest payout frequencies (monthly, quarterly, half-yearly, or annually) to match your cash flow requirements.

Convenience and Value-Added Benefits

Experience seamless investment management through our easy online application process with minimal paperwork. Enhance your financial flexibility with our loan-against-FD facility (up to 75% of deposit value after three months), premature withdrawal options, and comprehensive nomination facilities for complete peace of mind.

With our strong presence across rural and urban India, Mahindra Finance is positioned to support your entire investment journey with reliability, credibility, and exceptional service.

Suggested Read: Overdue Fixed Deposits & Its Impact On Interest Rates?

FAQs on FD vs Debt Funds

Which is Better FD or a Debt Mutual Fund?

The right answer is that both these financial instruments cater to different needs. You would need to select the right investment based on Financial Goals, Investment Horizon & Risk Appetite.

Can I invest in both FD and Debt Mutual Funds simultaneously?

Yes, but always make informed investment decisions based on needs and goals.

Are debt funds safe compared to FDs?

No. Debt funds carry market and credit risk. FDs are safer as they guarantee returns.

Can I lose money in debt funds?

Yes, you can lose money in debt funds due to three main risks: credit risk (when bond issuers default on payments), interest rate risk (bond values fall when interest rates rise), and market volatility (daily price fluctuations based on market conditions). Unlike guaranteed instruments like fixed deposits, debt funds do not offer capital protection and their values can decline, especially during short-term market stress or economic downturns.

How easy is it to withdraw from debt funds?

Very easy. You can redeem anytime at NAV. Some schemes may have an exit load if withdrawn early. It takes T+1 days for the money to be credited into your bank account.

Should I move all my investments from FDs to debt funds?

No. Diversification is generally a good advice when it comes to investing so always make informed investment decisions based on your needs, goals and risk appetite.

Which is better for a senior citizen, an FD or a debt fund?

FDs and debt funds are good investments options for senior citizens seeking relatively low-risk investments and income generation during retirement. The better choice depends on an individual's specific financial situation, risk appetite and investment goals.