FD vs Mutual Fund

FD Vs Mutual Fund

The key difference between FD and a mutual fund is that FD provides the safety of principal and a guaranteed rate of return, while a mutual fund carries a risk of loss of invested amount but can provide higher market-linked returns. FDs are offered by banks, financial institutions, and cooperative societies, whereas mutual funds are offered by fund houses or AMCs. 

This article covers: 

What Are Fixed Deposits?

Fixed deposits (FD) are an investment tool wherein you can invest a sum of money at a point in time, and you will get a fixed level of interest rate and the invested amount once the FD matures after certain years.  

In India, fixed deposits (FDs) are a common way to put money to work. They are a kind of savings plan made available by institutions like banks, NBFCs, and even post offices. FDs are a safe investment choice due to their set interest rate.

Funds deposited in a fixed deposit account at a bank or NBFC is guaranteed to be returned at the end of the investment term. It varies from 7 days to 10 years, depending on the duration of the deposit. The interest rate paid on FDs differs from bank to bank and is affected by variables including the size of the deposit, the length of the deposit term, and the current state of the market.

What Are Mutual Fund?

Mutual funds are a sort of investment company that uses the combined capital of many people to buy stocks, bonds, and other assets. The portfolio is overseen, and the investments are chosen by a professional fund manager on the client’s behalf.

One of the main attractions of investing in mutual funds is the diversity they provide for their shareholders by holding assets issued by a wide variety of firms and sectors. Investing in many sectors or securities spreads out the risk of a bad financial decision. 

Mutual funds are a good investing option because they are easily accessible, well-managed, and have minimal entry barriers. Moreover, the Securities and Exchange Board of India (SEBI) oversees these exchanges to safeguard investor funds.

FD Vs Mutual Funds Which Is Better?

FD is better than mutual funds for investors looking to earn an assured level of returns and having a zero-risk appetite. On the other hand, mutual funds are better for those who are looking to diversify their portfolio and want to earn higher returns with some risk. 

ParametersFDMutual Funds
SecurityThe investment amount is fully secured. The investment amount is not completely secured. 
Withdrawal Facility Premature withdrawal will attract some penalties. No penalty or percentage of exit load has to be paid for premature withdrawal in the case of open-ended mutual funds.
ReturnsFixed returnsFluctuating returns 
Tax on Earnings Taxed according to the investor’s tax slabsTaxed differently on the basis of the type of fund and time period. 
Regulatory Authority RBISEBI

FD Vs Mutual Funds Security 

The Reserve Bank of India (RBI) oversees banks and financial institutions issuing Fixed Deposits, ensuring solvency and stability, making them a safer investment choice with insured capital and income. Conversely, mutual funds are subject to market fluctuations and lack government backing, posing a risk of capital loss. However, expert fund managers make investment decisions, mitigating losses due to investor inexperience or ignorance.

FD Vs Mutual Funds Withdrawal Facility 

Mutual Funds provide more liquidity than fixed-income investments. In contrast to FDs, which have a defined maturity term and from which early withdrawal penalties and reduced returns may be incurred, mutual funds may be redeemed at any time, subject to an exit fee and other expenses.

Certain FDs, however, allow for withdrawals to be made ahead of schedule, albeit the interest rate paid in these cases is often lower than the initial rate. Hence, investors with a long investment horizon and no need for short-term liquidity might choose FDs. On the other hand, mutual funds are good for those who need access to their money quickly to satisfy immediate financial obligations.

FD Vs Mutual Funds Returns

Mutual funds offer greater liquidity than fixed-income investments like FDs, which have defined maturity terms and may incur penalties for early withdrawal. Mutual funds can be redeemed anytime, subject to fees and expenses. Some FDs allow early withdrawals with reduced interest rates. Investors with a long-term horizon and no need for short-term liquidity may opt for FDs, while mutual funds suit those requiring quick access to their money for immediate financial needs.

FD Vs Mutual Funds Tax on Earnings 

Mutual funds are subject to capital gains tax, with rates varying based on holding period and fund type, while interest from FDs is taxable income according to the investor’s tax slab. FD interest exceeding Rs 40,000 is subject to TDS, but investors with income below the tax withholding threshold can avoid TDS by filing Form 15G or 15H.

FD Vs Mutual Funds Regulatory Authority 

In order to safeguard investors’ money, FDs and Mutual Funds are both governed by regulatory agencies. The Reserve Bank of India (RBI) and the Deposit Insurance and Credit Guarantee Corporation (DICGC) oversee FDs, while the Securities and Exchange Board of India (SEBI) oversees mutual funds.

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FD Vs Mutual Fund- Quick Summary

  • The difference between FDs and mutual funds is that FDs are a more secure investment alternative than mutual funds. 
  • In FD, a fixed amount of money is invested for a certain period to get a lump sum amount in the future, which includes interest earnings. 
  • In a mutual fund, money is collected from various investors which are invested in different types of instruments that provide market-based returns.
  • Mutual funds have the potential to produce larger returns than FDs, but they are vulnerable to market risks and offer lesser protection. 

FD Vs Mutual Fund- Frequently Asked Questions

1. What are the differences between FD and mutual funds?

The difference between FD and mutual funds is that fixed deposits are a low-risk investment that pays a fixed level of interest, while mutual funds pool capital from many people to buy a wide range of securities that provide fluctuating returns. 

2. Is FD better than mutual funds?

FDs can be better than mutual funds for risk-averse investors because they provide a set rate of return and are often regarded as a low-risk investment choice. But, the returns on FDs are generally lower than those on mutual funds. 

3. Is FD better than SIP?

FD is better than SIP who are looking to invest money at once with a focus on earning a guaranteed return in the future. 

4. Which is better, FD or investment?

FD can be better than investment because they offer a guaranteed interest rate after a certain investment period. Conversely, investments are any item purchased with the expectation of a future financial gain which can be FDs, mutual funds, stocks, etc.

5. What is the best alternative to FD?

The best alternative to FD is the mutual fund investment through the lump sum method, which can provide a higher rate of return in the long period. 

6. What is the disadvantage of FD?

The disadvantages of FDs are that they offer lower returns than those on investments such as equities and mutual funds, and early withdrawal from FDs is subject to a penalty.

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