Fixed Deposits vs Mutual Funds - Know the 8 Main Differences| North Loop Official Blog
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31 Jul 2020

Fixed Deposits vs Mutual Funds - Know the 8 Main Differences

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Fixed Deposits and Mutual Funds are both popular investment options among investors. To understand how they compare in terms of return, taxation, growth and stability, we have created a list of the 8 main differences between them that will help you decide the best investment option for you and also help in answering the question – Are fixed deposits better than mutual funds?
However, before we move to the differences, let us begin by understanding mutual funds, fixed deposits and their key features -

Fixed Deposits –

A fixed deposit is a financial instrument offered by banks and other NBFCs that allows you to earn a higher rate of interest compared to a regular savings account. The interest rate for a fixed deposit is predetermined and does not fluctuate with market returns, and therefore, it ensures guaranteed returns with minimal risks.
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Return table –

The following table shows some of the historically highest FD rates for a maturity period of 3 – 5 years.

Year Interest Rate
1996-9712% - 13%
1997-9811.5% - 1%
1998-9910.5% - 11.5%

Mutual Funds –

Mutual Funds are market-based investment instruments with no fixed rate of return. They are a suitable investment option to get exposure to expert managed portfolios whereby you get allotted with fund units based on the amount you spend, and your pooled investments are handled by professional fund managers who in turn can help you earn optimum returns. There are broadly three types of mutual funds - Debt, Equity and Hybrid.
Debt – These are funds that invest only in fixed income instruments
Equity – These funds invest only in stocks and other equity instruments
Hybrid – These are funds that divide investments between equity and debt to create a balance.

Differences between Fixed Deposits and Mutual Funds/ How to Choose Between Fixed Deposits or Mutual Funds –

Rate of Return –

The interest rate on fixed deposits is generally fixed and varies with different banks. The rate of interest offered by most banks in India varies between 4.5% and 7%. However, digital banking platform North Loop offers an industry-highest rate of 7.5%. Since the rate of interest for FDs is predetermined, they do not change throughout the tenure of your investment. However, mutual funds return rates depend on the market volatility as well as the type of fund you have opted. Unlike fixed deposits, as and when the market goes up, you can expect higher returns on your mutual fund investment and vice-versa.

Return on Investment –

Fixed deposit returns are fixed and primarily depend on the tenure and type of fixed deposit – cumulative or non-cumulative. On the other hand, mutual fund returns are completely market-linked and in case of Equity mutual funds, are dependent on the performance of the stock market.

Debt mutual funds vs Fixed Deposits -

Fixed income-based mutual funds tend to be similar to fixed deposits in terms of their return profile, and for a mid or short-term mutual fund (like debt funds), the return is usually in the range of 6%-7%.

Risk –

Fixed deposits carry zero risks as your interest rate and return are pre-determined for a specific tenure of investment. The risks involved in mutual funds are mostly influenced by the market and vary depending on the type of funds you have invested in. For example, equity funds have a majority of the amount invested in the stock market and therefore, possess higher risks.

Debt mutual funds vs Fixed Deposits -

Debt mutual funds invest only in fixed income instruments and have lower risk compared to equity funds. However, they are not risk-free.

Expenses –

Fixed deposits do not come with any sort of expenses throughout the investment or tenure of the deposit. However, mutual funds carry expenses or operational charges that are deducted as a part of managing the fund. Most of the time, the expense ratio associated with mutual funds is synonymous with mutual fund charges, however, sometimes there can be other investment expenses that you may be required to pay.

Liquidity –

Fixed deposits are fairly liquid investments as your invested amount gets locked for a fixed period. To withdraw your amount before the specified tenure, you usually have to give a penalty to your bank. Mutual funds, on the other hand, possess higher liquidity, especially if they fall into the category of debt mutual funds. That is because, these funds primarily invest in short-term financial instruments like treasury bills, commercial papers, and other forms of debt securities that come with short maturity periods of around 91 days. Moreover, debt mutual funds do not come with a lock-in period, and you can withdraw your money any time you choose to.

Inflation impact –

Fixed deposit returns are unaffected by inflation as they are pre-determined and fixed and do not change over time. However, mutual funds are inflation-adjusted and consequently can give higher returns for your investments. For example, if you have opted for equity funds and the GDP of our country grows, then the companies that the equity funds have invested in also grow because of the effect of inflation. This, in turn, leads to higher share prices of those companies and ultimately higher returns to you.

Taxation –

Fixed deposits are subject to 10% TDS (Tax Deduction at Source) on interest earned above Rs.10,000 over a financial year. (If you are an NRI, the interest earned from deposits in your NRO account gets subjected to tax deductions at a flat rate of 30%). Taxes paid on your mutual fund investments depend on various factors such as what kind of funds you have invested in, the duration of your investments, and to which income tax slab you belong. If you have invested in equity mutual funds and sell them in less than one year, your fund returns are treated as Short Term Capital Gains (STCG) and get subjected to STCG tax at 15% (plus 4% cess). If you redeem your equity investments after one year, they get considered as Long Term Capital Gains (LTCG), and your gains over Rs.1 lakh get taxed at 10% (plus 4% cess), without any indexation benefit. Debt mutual funds, on the other hand, if sold within three years are considered as STCG and taxed as per the income tax slab applicable to you. Those sold after three years are LTCG and taxed at 20% with indexation benefit.

Tax-savings –

Investing in bank fixed deposits allows you to claim a tax deduction of up to Rs.1.5 lakh in a financial year under Section 80C of the Income Tax Act. To avail the tax benefit, you cannot withdraw the deposit before a lock-in period of five years. Mutual funds, on the other hand, are not covered under Section 80C deductions except ELSS or equity-linked savings scheme. These are mutual funds that invest predominantly in equities or equity-oriented products and have a three year lock-in period.

Fixed Deposits vs Mutual Fund SIP

To differentiate between fixed deposits vs mutual fund SIP, you can look at the table below-

Parameters Fixed Deposits Systematic Investment Plan (SIP)
Type of InvestmentIn lump-sumIn installments
Risk factorLowHigh
ReturnsGuaranteedCan't be guaranteed
Nature of returnsInterestDividends and capital gain
TaxTax is charged depending on the income tax slab in which the investor falls.If the units of the mutual fund are sold after the completion of an year, long term capital gains is charged. If the mutual fund units are sold before the completion of an year, tax is charged at 15%.

Are Fixed Deposits Better Than Mutual Funds - How to choose between the two?

The choice between bank fixed deposits or mutual funds depends on your risk appetite and availability of funds. If you are looking for a safe, low-risk investment, it is better to opt for fixed deposits. You can sign up with North Loop and earn a high-interest rate of 7.5% with guaranteed returns and zero risks.
You can learn more about the different types of fixed deposits and their benefits here.

How to invest?

Fixed deposits -

You can invest in a fixed deposit account by approaching any bank or NBFC and by depositing a lump-sum amount for a locked-in period. You can also invest in FDs via a digital banking platform like North Loop.

Mutual funds – You can invest in MFs by approaching an AMC or through a platform like ours. The process is quick, convenient and does not take time.

Suggested Reads:

Fixed Deposit VS Mutual Funds Comparative Analysis

Fixed Deposits VS Stocks – What Should NRIs Invest In?

5 Ways to Maximize Returns From Fixed Deposits

Fixed Deposit and Recurring Deposit

Real Estate VS Mutual Funds – Which Is a Better Option?

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.