Fixed deposits vs debt funds which is a better investment option?


FD vs Debt Funds? Thinking where to invest? If you have adequate savings and looking for investment opportunities, both these options are open to you. Fixed deposits and debt funds have their own distinguishing features.

Before you take a final decision, here are some factors to help you decide the better investment option for you.

Returns on investment

There is a pre-determined interest rate for fixed deposits depending upon the period of investment. Currently, the interest rates for FDs are between 6% and 8%. This interest rate does not change even during a financial crisis or volatility.

Returns from debt mutual funds rely on market movements and are not fixed. Fluctuating interest rates depend on a fund’s performance and investment portfolio. Typically, mutual funds carry an interest rate between 14% and 18%.

Tax liability

FDs offer returns on investment in the form of interest. But, when you invest in mutual funds, you earn returns in the form of capital appreciation or dividends. Hence, both these incomes are taxed differently.

In the case of FDs

Interest from FDs is taxed according to your personal tax rate. For example, if you fall in the 30% tax bracket, the interest component will attract 30% tax.

In case of debt funds

Tax rates for debt funds depend on their holding period.

Short-term capital gains tax:

If the debt funds are held for a period of thirty-six months or less, they attract STCG tax calculated as per the income tax slab of the investor.

Long-term capital gains tax:

If the debt funds are held for more than thirty-six months, they attract LTCG tax of 20% with cost indexation on the amount of gain.


Proceeds from open-ended debt funds are typically credited into your account within two or three working days. Depending on the types of mutual funds, there may be an exit load of 0.25% to 1% if redeemed within a pre-specific period. The pre-specific period may range from fifteen days to six months.

Proceeds from FDs are typically available at one or two days’ notice. However, they carry a penalty if the said proceeds are redeemed before the maturity date.Most banks deduct 1% from the original rate card. This is applicable for the period for which the FD has been in force or the initial bookingrate, whichever is lower.

Associated risks

Bank FDs are one of the safest investment options when you have surplus cash. This is because the Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees all bank deposits of up to Rs. 1 lakh in case the bank fails. The coverage includes savings, current, recurring and fixed deposits.

When you look at equity funds vs debt funds, equity funds are riskier in comparison. Debts funds invest in corporate deposits, government securities, money market instruments, etc. While they are considered more stable, there is still a possibility of bankruptcy or risk of default of concerned parties. However, the mutual fund regulator, SEBI, has issued a mandate that allows only companies with good credit to raise debt.


Thus, depending on your risk appetite, investment goals and your need for liquidity, you can choose between FDs and debt funds. If your financial goal is to generate income in the short run, you can invest in debt funds. On the other hand, you can park your funds in a fixed deposit for a fixed tenure if you don’t want market movements to impact your earned returns.

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