Mutual Fund vs Fixed Deposit: Which Gives Better Returns?

Last Updated on June 2, 2025 9:21:40 PM by Vivek Makwana

When it comes to saving and growing your hard-earned money, two of the most popular financial instruments in India are mutual funds and fixed deposits (FDs). Both offer unique advantages and cater to different types of investors. However, the key question remains: Which gives better returns – mutual fund or fixed deposit?

In this article, we will break down the differences between mutual funds and fixed deposits, compare their returns, and help you decide which investment option is better suited for your financial goals.

What is a Mutual Fund?

A mutual fund is an investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities. These funds are managed by professional fund managers who aim to generate returns based on the fund’s objective.

There are various types of mutual funds such as:

• Equity mutual funds (invest in stocks)
• Debt mutual funds (invest in bonds and securities)
• Hybrid mutual funds (mix of equity and debt)

What is a Fixed Deposit?

A fixed deposit (FD) is a financial instrument offered by banks and non-banking financial companies (NBFCs), where you deposit a lump sum of money for a fixed period at a predetermined interest rate. It is considered one of the safest investment options with guaranteed returns.

You can choose the tenure of your FD ranging from 7 days to 10 years. The interest earned is either paid at regular intervals or reinvested until maturity.

Returns Comparison: Mutual Fund vs Fixed Deposit

1. Returns from Mutual Funds

The returns from mutual funds are not fixed. They depend on market performance, fund type, and how the investments perform over time.

• Equity mutual funds have the potential to generate 10–15% annual returns over the long term.
• Debt mutual funds may offer 5–8% annual returns, depending on interest rates and bond yields.
• The returns are market-linked and come with a certain level of risk.

2. Returns from Fixed Deposits

Fixed deposits offer predefined interest rates ranging from 5% to 7.5%, depending on the bank and tenure. These returns are guaranteed and risk-free, making FDs suitable for conservative investors.

However, FD interest rates have been declining in recent years, especially after the COVID-19 pandemic. This makes FDs less attractive for long-term wealth creation compared to mutual funds.

Risk Factor

• Mutual Funds: These are subject to market risks. Equity mutual funds can be volatile in the short term, but they offer higher growth potential over the long term. Debt mutual funds carry lower risk but are still subject to interest rate fluctuations.
• Fixed Deposits: FDs are low-risk investments. Your principal and interest are safe as long as you invest with a reputed bank or NBFC. They are ideal for risk-averse individuals or senior citizens.

Liquidity

• Mutual Funds: Most mutual funds offer high liquidity. You can redeem your units anytime (except ELSS with a 3-year lock-in). However, there might be exit loads or tax implications if you withdraw early.
• Fixed Deposits: FDs are less liquid. Premature withdrawal usually attracts penalties or reduced interest rates. Some banks offer sweep-in or partial withdrawal options, but they come with conditions.

Taxation

• Mutual Funds:
  • Equity mutual funds attract 10% LTCG tax on gains above Rs1 lakh held over one year.
  • Debt mutual funds (as per new rules from April 2023) are taxed as per your income slab, just like FDs.
• Fixed Deposits:
  • Interest earned on FDs is fully taxable as per your income slab.
  • If the interest exceeds Rs40,000 in a financial year (Rs50,000 for senior citizens), TDS is deducted.

So, mutual funds offer better tax efficiency, especially in the case of equity funds.

Investment Horizon

• Mutual Funds: Ideal for long-term investors who want to grow wealth over time. Equity mutual funds, in particular, perform better over 5–10 years or more.
• Fixed Deposits: Suitable for short-term to medium-term goals or emergency funds. They are not effective for beating inflation in the long run.

Inflation Impact

One major drawback of FDs is that the returns barely beat inflation, which erodes your purchasing power over time. Mutual funds, especially equity-oriented ones, have a higher chance of beating inflation and creating real wealth.

Difference Between Mutual Fund and Fixed Deposit:

There are four main types of mutual funds, based on the investment objective and asset class. Here’s a simple breakdown:

✅ 1. Equity Mutual Funds

• Invest mainly in stocks or shares.
• Suitable for long-term wealth creation.
• Higher returns but also higher risk.
• Examples: Large-cap, Mid-cap, Small-cap, ELSS (Tax-saving).

✅ 2. Debt Mutual Funds

• Invest in bonds, government securities, and fixed income instruments.
• Lower risk and stable returns (5%–8%).
• Suitable for short to medium-term goals.
• Examples: Liquid funds, Short-term funds, Gilt funds.

✅ 3. Hybrid Mutual Funds

• Invest in a mix of equity and debt.
• Balanced risk and return.
• Good for moderate risk investors.
• Examples: Aggressive hybrid funds, Conservative hybrid funds.

✅ 4. Solution-Oriented Funds

• Designed for specific goals like retirement or child’s education.
• Usually come with a lock-in period of 5 years or until goal maturity.
• Help with goal-based investing.

Bonus: Other Classifications

Mutual funds can also be classified based on:

➤ Structure:

• Open-ended (buy/sell anytime)
• Close-ended (fixed maturity)
• Interval funds (redeemable at specific intervals)

➤ Tax-Saving:

• ELSS (Equity Linked Savings Scheme) – gives tax benefit under Section 80C.

Real-Life Example

Let’s say you invest Rs1,00,000 for 5 years:

• In a fixed deposit at 6.5% interest per annum, your corpus will grow to around Rs1,38,000.
• In an equity mutual fund with an average return of 12% per annum, your corpus may grow to around Rs1,76,000.

That’s a significant difference, which becomes even more noticeable over 10 or 15 years.

Final Verdict

While both mutual funds and fixed deposits have their own benefits, the mutual fund clearly stands out when it comes to long-term returns and wealth creation. FDs are safe but provide limited growth. Mutual funds offer the potential for higher returns, tax advantages, and better inflation-adjusted gains.

However, your choice should depend on your risk appetite, financial goals, and investment horizon. A balanced approach — investing a portion in FDs for safety and a portion in mutual funds for growth — might be the best strategy for many investors.

FAQ: Mutual Fund vs Fixed Deposit – Which Gives Better Returns?

1. What is the difference between a Mutual Fund and a Fixed Deposit?
A Mutual Fund pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. It is subject to market risks, and returns can vary. A Fixed Deposit (FD), on the other hand, is a low-risk investment where a lump sum amount is deposited for a fixed tenure at a predetermined interest rate.

2. Which investment offers better returns: Mutual Funds or Fixed Deposits?
Mutual Funds typically offer higher returns than Fixed Deposits, as they invest in equity and other market-linked instruments. However, the returns are subject to market fluctuations, making them riskier. Fixed Deposits offer stable returns, but the interest rates are generally lower compared to potential returns from Mutual Funds.

3. Are Mutual Funds safer than Fixed Deposits?
No, Mutual Funds are not considered as safe as Fixed Deposits. While Fixed Deposits are guaranteed by the bank, Mutual Funds are subject to market risks, and there is no assurance of returns. The safety of your investment in Mutual Funds depends on the type of fund and market conditions.

4. Can I lose money in a Fixed Deposit?
Fixed Deposits are considered low-risk investments, and the principal amount is generally safe, as long as you stay within the limits of the insurance coverage offered by banks (up to Rs5 lakh per depositor). However, if you break an FD prematurely, you may incur penalties or lower interest rates.

5. Are Mutual Funds a good investment for beginners?
Mutual Funds can be a good investment for beginners, especially those who want diversification without having to pick individual stocks. However, it is important to understand the risk and market conditions before investing. Opting for equity-oriented Mutual Funds can be riskier, while debt funds are relatively safer.

6. What factors should I consider before choosing between Mutual Funds and Fixed Deposits?
Before choosing between the two, consider your risk tolerance, investment horizon, and financial goals. If you’re looking for steady income with minimal risk, Fixed Deposits might be a better option. If you’re aiming for higher returns and can tolerate some risk, Mutual Funds could be a suitable choice.

7. Can I invest in both Mutual Funds and Fixed Deposits?
Yes, you can invest in both. In fact, a balanced investment portfolio may include both low-risk Fixed Deposits and higher-risk Mutual Funds to ensure a mix of stability and growth potential.

8. How are returns from Mutual Funds taxed?
The taxation on Mutual Fund returns depends on the type of fund (equity or debt) and the holding period. Long-term capital gains (LTCG) from equity funds are taxed at 10% (if gains exceed Rs1 lakh per year), while short-term capital gains (STCG) are taxed at 15%. Debt funds have different tax structures, and returns are subject to income tax based on your income bracket.

9. How are Fixed Deposit returns taxed?
The interest earned from Fixed Deposits is taxable as per your income tax slab. Banks will deduct TDS (Tax Deducted at Source) on FD interest if the amount exceeds Rs40,000 in a financial year (Rs50,000 for senior citizens). You can claim a refund if the TDS is higher than your actual tax liability.

10. Can I redeem my Mutual Fund investment anytime?
Yes, you can redeem Mutual Fund units at any time, but the timing of the redemption may impact your returns, especially in the case of equity funds, which are more volatile. However, some Mutual Funds may have a lock-in period (like ELSS) or exit load charges for early withdrawals.

Conclusion

If your goal is to beat inflation and create wealth over time, investing in a mutual fund is a smarter choice compared to fixed deposits. But if you prioritize safety and guaranteed returns, FDs are still a reliable option. Understand your risk tolerance, assess your financial needs, and make an informed decision.

Disclaimer:
The content provided in this article is for informational purposes only and should not be construed as financial advice. Mutual funds and fixed deposits come with different risk profiles, and past performance is not indicative of future results. We recommend that you consult with a certified financial advisor to assess your individual financial situation and risk tolerance before making any investment decisions. The author and the website do not bear any responsibility for any financial decisions made based on the information shared in this article. Always do thorough research before investing.

Mutual Fund vs Fixed Deposit: Which Gives Better Returns?