Fixed Deposit vs Mutual Fund

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Fixed deposits and mutual funds are two of the popular investment choices. Both options provide investors with promising returns to help them realize their goals well within time.

Where fixed deposits offer guaranteed returns at pre-fixed interest rates, mutual fund investments provide variable returns depending upon how the market performs.

In this article, we shall highlight the primary differences between FD and MF as well as the returns in both these avenues. Also, we shall be looking at the after-effects of COVID-19 on fixed deposits and investment in mutual funds.

Fixed Deposit vs Mutual Fund

Parameter	Fixed Deposit (FD)	Mutual Fund (MF)
Returns	Fixed	Variable
Risk	Negligible	Significant
Investment via	Directly with the bank/company	Directly with fund houses or indirectly via distributors/brokers
Withdrawal	The penalty is imposed on premature withdrawal which constitutes lowering of the interest rate at which due returns are to be paid (Some banks may not charge any penalty)	MF is an open-ended investment and can be withdrawn anytime without penalty (Exit loads of 1% or higher may be applicable depending upon the fund.)
Insurance	Up to Rs. 5 lakh deposit insurance by DICGC	No insurance provided

Taxation – MF and FD 

Fixed Deposits  

• TDS @ 10% if interest in a FY crosses Rs. 40,000 (Rs. 50,000 for senior citizens)
• It is 20% if PAN is not submitted
• Those who have zero taxable income should submit Form 15G/H to avoid TDS on FD

Check how to fill Form 15G/H 

Mutual Funds 

Returns earned from MF are subject to short-term or long-term capital gains, whichever is applicable.

Equity-based Funds:

STCG: 15% on interest above Rs. 1 lakh

LTCG: 10% on interest above Rs. 1 lakh

Debt Funds: 

STCG: As per income tax slab if redeemed within 3 years from the date of unit allocation

LTCG: 20% of returns with indexation benefit, if redeemed after 3 years from the date of unit allocation

*STCG – Short Term Capital Gains; LTCG – Long Term Capital Gains 

How to Invest in Mutual Funds?

• To invest in a mutual fund, you need to have an investment account
• For this, it is required to get your KYC (Know Your Customer) process done with
• This requires your photograph, your signature, one ID proof, preferably Aadhaar and an address proof
• On successful activation of this account, you can start investing in a mutual fund

There are two ways of investing in a mutual fund, viz. directly with the AMC (Asset Management Company) or via an authorized intermediary like a banker, broker, and platforms like Paytm Money.

Is it a good time to invest in mutual funds?

The market is hit very badly and returns are falling down sharply. However, ironically MF values are so low, it is by far the best time to invest since demonetization. A simple principle applies here; lower the prices – best to buy, higher the prices – the best time to sell.

Returns in Mutual Funds vs Returns in Fixed Deposits

• Returns in mutual funds

Generally, the rate of return in mutual funds is higher than it is in fixed deposits. It is because mutual funds give exposure to market-linked investments such as equity and debt instruments. Funds in a mutual fund are effectively managed by professional fund managers and they keep on allocating funds where the returns can be optimum. This leads to better returns.

Some of the best mutual funds to invest in today’s time are tabulated below:

Fund Name	Category	3- Year Returns (%)	5- Year Returns (%)
ICICI Prudential Long Term Bond Fund	Debt- Long Duration	10.16	10.56
SBI Magnum Medium Duration Fund	Debt- Medium Duration	9.37	10.16
Axis Bluechip Fund	Equity- Large Cap	8.35	8.45
Kotak Debt Hybrid Fund	Hybrid- Conservative	5.72	8.23
Motilal Oswal Long Term Equity Fund	ELSS (Tax Saver)	-1.69	7.41
Axis Long Term Equity Fund	ELSS (Tax Saver)	5.10	7.01
IDFC Dynamic Equity Fund	Hybrid- Dynamic Asset Allocation	4.84	5.48
ICICI Prudential Bluechip Fund	Equity- Large Cap	0.61	5.11

(Data as on 29th May 2020; Source- Value Research)

Note: The aforementioned funds (all being direct funds) have been arranged in descending order according to their 5-year trailing returns.

• Returns from fixed deposits

Fixed deposits, as the name clarifies, come with a seal of guaranteed returns. Deposits made in scheduled banks come with Rs. 5 lakh insurance by DICGC. In any FD scheme, the FD rates are decided at the time of booking the FD and remain the same till the end of FD tenure.

It is the first time in a long time that large banks like SBI have lowered their FD rates to a sharp low of 2.90%. This is lower than what a basic savings account offers. Other banks are also following the lead and interest rates are nowhere expected to recover soon. However, when it comes to mid-term or long-term FDs, depositors can still benefit with up to 9% returns by booking FD in banks like Fincare Small Finance Bank and Suryodaya Small Finance Banks.

Some of the banks/NBFCs* offering the best FD interest rates are stated below:

Bank Name	Returns (% p.a.)		Tenure
	Regular Individuals	Senior Citizens
Fincare Small Finance Bank	8.00%	8.50%	1000 days
Suryodaya Small Finance Bank	8.51%	8.76%	999 days
Utkarsh Small Finance Bank	8.00%	8.75%	700 days
Equitas Small Finance Bank	8.00%	8.50%	888 Days
DCB Bank	7.85%	8.35%	more than 700 days to 3 years
IDFC First Bank	7.50%	8.00%	18 months 1 day to 3 years
RBL Bank	7.55%	7.75%	15 months to 725 days
IndusInd Bank	7.25%	7.85%	2 years up to 2 years 1 month

*Non-Banking Financial Companies

(Data as on 27th Dec 2022. Source: Official websites of respective banks)

To calculate the maturity amount as well as total interest expected from fixed deposit investment, you can use Paisabazaar’s FD calculator, an online tool available for free. This way you can easily predict your returns on FD.

Fixed Deposits or Mutual Funds, Which is Better?

Choosing between these two options requires thorough analysis, moreover, understanding of one’s risk-return appetite.

While mutual funds come with a good mix of risk-return, FDs help strike the right balance in one’s portfolio since these do not have any significant risk label attached to them.

Our Advice

For Senior Citizens

Senior citizens are advised to safeguard their money in special senior citizen FD schemes like SBI We Care, HDFC Senior Citizen Care, and ICICI Bank Golden Years. These schemes are offering up to 0.80% higher interest on the standard FD interest rates.

Scheme	Offer	Rate of Interest	Tenure
SBI We Care	0.80% extra	7.55%	5 years – 10 years
HDFC Senior Citizen Care	0.75% extra	7.75%	5 years 1 day – 10 years
ICICI Golden Years	0.60% extra	7.60%	5 years 1 day – 10 years

Know more about Special Senior Citizen Fixed Deposit Schemes.

If senior citizens wish to invest in mutual funds, they should go for debt mutual funds and not equity-based funds. Debt funds provide better stability and have decent performance.

For others (i.e. non-senior citizens)

For those looking to invest in the market, it’s a good time since the MF values are low. However, the returns should take around 3 years at least to tilt towards the positive mark. Do not expect significant returns sooner.

Also, as we have learned, any moment can turn into a black swan situation, like the current novel coronavirus. With market-linked investments, there is no guarantee of returns coming back to pre-COVID crisis levels in the short term. Hence, if you continue investing in mutual funds during this period, consider staying invested for a period of 3 years or longer for maximized returns.

Paisabazaar

2 Comments

Sarika

June 26, 2020

Informative.

Reply

Team PaisaBazaar

June 26, 2020

Thanks

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