Bank FD Vs Debt Mutual funds – Which is the best investment option?

Bank FD Vs Debt Mutual funds – Which is the best investment optionBank FD Vs Debt Mutual funds – Which is the best investment option?

Many of the conservative investors look Bank Fixed deposit has the safe investment option. In the last few years, investors have shifted their focus to debt mutual funds, as they offer higher returns compared to bank fixed deposit. In this article we would discuss about Bank FD Vs Debt mutual fund, which one scores higher and which is the best investment option?

Bank FD Vs Debt Mutual Funds

1) Returns on investment

  • Bank Fixed deposit provides fixed rate of returns upon maturity. The interest rates are between 4% to 9.5% per annum depending on the maturity period.
  • Debt Mutual funds on the other does not provide fixed rate of returns. They invest in debt instruments, bonds, corporate deposits, government securities etc. In the last 5 years, debt mutual funds yielded returns of 9% to 11% per annum.
  • Thus debt mutual fund scores high in term of returns on investment.

2) Taxation on returns

  • Bank FD returns are generally added to individual’s income for tax computation purpose. If an individual is in highest tax bracket of 30%, then the returns on bank FD’s would be low.
  • Debt mutual funds on other hands are tax efficient investment option. The returns on debt mutual funds for less than a year attract short term capital gain and would be added to individual’s income and tax would be computed. If an individual is in highest tax bracket of 30%, the returns would be low. However if the debt mutual funds are invested for more than one year, any returns from debt mutual funds would attract long term capital gain. The taxation would be 10% on returns or 20% of returns after indexation. If you plan and invest during financial year end and sell in 3rd financial year, you would get double indexation benefit. With double indexation benefit, your tax would be small or almost zero.
  • In case of dividends from debt mutual funds, these are tax free in the hands of investors. However, mutual fund companies need to pay dividend distribution tax (DDT) of 14.6% to Government.
  • Hence, from taxation point of view, debt mutual funds scores high.

Also read: How double indexation in mutual funds can save tax 

3) Liquidity of the investment

  • Bank Fixed deposits can be closed at any time. However some banks are still charging pre-matured withdrawal charges of 0.5% to 1% of investment.
  • Debt mutual funds on the other hand are also high liquid investments. You can redeem the debt mutual funds at any time. However if you close within one year, you need to pay exit load of 1%. Beyond one year, you need not pay any additional charges.
  • Hence, if you are looking for more than one year period, Debt mutual funds would score high.

4) Additional Costs to be incurred

  • Bank Fixed deposits do not charge any additional costs during the period of investment.
  • On the other hand, asset management companies charge administration charges or management fees on mutual funds. The cost would range between 0.5% to 2% of the investment. However these are reduced from the profits and they are indirectly reduced from the returns.
  • From costs point of view, bank FD’s would score high.

5) Risk of investment

  • Bank Fixed deposits are assumed to be safe. However they are insured up to Rs 1 lakh only. Any investment beyond this is risk. Since they are closely monitored by Reserve Bank of India, except for small incidents, the banking sector is under control.
  • Debt mutual funds on the other hand do not offer such safety of investment as the investments are prone to market risks. The interest is not guaranteed and there can be negative returns and the capital itself can be reduced. However, mutual fund sector is governed by SEBI and there are tight controls.
  • Hence, from risk point of view, bank fixed deposit scores high.

​Also read: Top-10 Debt mutual funds to invest in 2013

6) Inflation impact

  • Bank Fixed deposits provide fixed returns irrespective of inflation.
  • Debt mutual funds on the other hand provide “real returns” even in case of high inflation.
  • Debt mutual funds score high when you check the inflation impact.

7) Capital appreciation

  • Bank Fixed deposits offer only returns on investment and no capital appreciation.
  • Debt mutual funds on the other hand provides capital appreciation if invested for medium to long term period.

Conclusion: If an individual can take little risk, debt mutual funds provide good returns compared to bank fixed deposits. However if you are risk averse investor and do not want to take any risk, bank fixed deposits would score high and it would be the best investment option.

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Bank FD Vs Debt Mutual funds


  • rakesh

    I have 2lac ruppies for invest if u say debt mutual fund is best but I have no knowledge of mutual fund so what Should I do?
    If possible please explain in detail of it

  • jamesfranklin

    Mutual funds are better compare to fixed deposits. The fixed deposit is one such investment that will offer you the investment option for the fixed term. The mutual fund is therefore considered the better investment option when you are looking for good returns.

  • Ravi

    Hi Suresh,

    What is capital appreciation? How debt funds provide capital appreciation? Could you please elaborate with an example?



    • Ravi, What I meant here is the high returns which you can expect which gets added to the capital especially when the interest rates are going down. For e.g. If we invest Rs 1 lakh, normally we expect 9% to 11% p.a. returns. In the markets where interest rates are going down, debt funds would provide excellent returns and it could be even 12%+. So instead of Rs 9,000 to Rs 11,000 returns, you may get more than Rs 12,000. You may not always get such appreciations all the time. Now your 2nd year oening balance would be Rs 1 lakh + Rs 12K = Rs 112,000. This is one way we can say it is re-invested interest. However in Bank FD, the returns are fixed irrespective of market state.

      • Ravi

        Thanks Suresh for the detailed explanation. The FDs too can be renewed post maturity, and in that case the interest will be given to the renewed amount.

  • If you are an NRI (i.e, no taxation on NRE FD), don't u think that FD's score much better than debt funds ? ( after considering expense ratios and capital gains tax ) ?

    • Ajith, How does it differ for a NRI or ordinary individual ? There is no seperate tax treatment or concessions for NRI’s.

      • FD's linked to NRE accounts are not taxable. Only if u make an FD linked through ur NRO account, u hav to pay tax..  If u put in money to a debt / equity fund, either from an NRE or NRO account, tax is applicable at the normal rates

  • Ravikumar N

    Dear Suresh,

    Really nice article. Adding to your inputs, I have one point to share with you. If any person having to invest lumpsum amounts (for eg. bonuses etc), invest in any Liquid fund and make an STP (Systematic Transfer Plan) with some amount on monthly basis to any diversified equity MF (based on his risk appetite). This would give much more better returns than above Bank FD and Debt MF. However, investor has to choose the target MF with in the same fund house for STP. Please correct me if I am wrong.


    Ravi N

    • Ravi. The switch of mutual fund should happen within fund house. However every switch is treated as seperate transaction and taxation would apply as per rules.

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