Mutual Funds vs FD: Are MF Safer than FD?

If you ever ask any traditional Indian household what their go-to investment choice is, it would be fixed deposits. After all, the concept of โ€œour money stays in the bank and no riskโ€ is predominantly etched in the concept of fixed deposits.

As an investor, you may find yourself in a dilemma while choosing between mutual funds and fixed deposits. Fixed deposits are fixed-income investment tools and an easy concept that have been prevalent for ages. On the other hand, mutual funds are equity investment tools that yield higher returns compared to FDs. It then also possess comparative higher risk than FDs.ย 

If you are unsure about mutual funds vs FD, and where you should park your money, this article is for you.ย 

Fixed Deposits vs Mutual Funds: An Overview

Fixed deposits are fixed-income financial instruments which are offered by institutions like banks, non-banking financial companies and post offices. FDs offer a higher interest rate than your regular savings or salary account for a fixed duration. 

FDs come with a maturity of a few days to 7 to 10 years. The earned interest can either be reinvested or withdrawn upon maturity or at a set interval. However, if you withdraw the principal amount before maturity, you may get penalized. 

On the other hand, mutual funds pool money from multiple investors and invest the same in stocks, bonds, gold, etc., based on an investorโ€™s risk appetite and requisites. These funds are offered by asset management companies and managed by skilled fund managers. 

As a unit holder in a mutual fund scheme, you will have ownership rights over the assets. The best part is that you do not mandatorily need a Demat account to invest in mutual funds.ย 

You can also take Upsurge.clubโ€™s mutual fund course online to get yourself familiarised with the concept. This course will give you deep insight into how this instrument functions and how you can start your journey.ย 

Mutual Funds vs FD: A Comparison

Hope all the basics are clear! Now let us look at a few metrics that will help you determine which of these investments is the one best suited for you.

1. Liquidity

Mutual funds are highly liquid financial securities which can be encashed at any given point in time. These funds do not have a lock-in period with the exception of close-ended funds! 

Most of the funds do not have an exit load, too, if the minimum investment maturity is completed. Your money gets deposited within a short period of time! 

However, fixed deposits have a lock-in period which reduces the liquidity of these financial securities.

Furthermore, if you want to redeem your investment before the maturity of these funds, you will have to pay the penalty on the return amount. This penalty is a percentage of the total amount determined by the financial institution offering FDs. Though, post-withdrawal, the amount gets credited to your bank account quickly.ย 

2. Return on Investment

Fixed deposits offer fixed and assured returns to investors. This means that a change in interest rates will not affect your FD. 

While this surely is an advantage in situations where the interest rate offered becomes lesser. You will be at a loss if the FD interest rate increases before your maturity. If you decide to reinvest the money with the higher interest rate, you will be charged a penalty for the premature closure of your existing FD.ย 

Mutual funds do not offer you guaranteed returns because they are subject to market risk. Based on the usual market trends, the returns on your investment change.

Depending on mutual funds and where the pooled fund is invested by the AMC, they offer higher returns on your investments than FDs. FDs offer a typical return of 5% to 8%, while mutual funds offer average returns of 10%+ over the long run. 

While considering return on investment, you also need to account for the inflation rate as it reduces the overall return inflow. For example, the average retail inflation for January-March 2023 stands at 4.7%, while the FD interest rate ranges between 5 to 6% for most of the tenures. This means your net returns would be about 0.3-1.3% only in the case of FDs. 

On the other hand, if the mutual fund you have invested in offers 13% returns, your real return would be 8.3%. However, you should also note that FDs are safer compared to MFs.ย 

3. Safety

Theoretically, fixed deposits are considered to be 100% safe and risk-free because of the assured returns. However, you should remember that the safety of your FD is highly dependent upon the financial solvency of the bank or the financial institution. 

While the RBI oversees investor interest protection and regulation, there are several cases where depositors found themselves in a lurch. In some situations, there might be limits placed on the amount of premature withdrawal, which can be an enormous problem if you urgently need liquid cash. 

While comparing, mutual funds are subject to market risk. However, they diversify the investment portfolio by investing in various bonds and stocks. To some extent, it mitigates the risk. The good news is that the market is full of myriads of mutual fund schemes that range from low risk to high risk. You can pick schemes based on your risk appetite.ย 


We hope this blog helps you explore and obtain clarity about mutual funds and fixed deposits. Remember that while mutual funds may not be as safe as fixed deposits due to the risk factors associated, they are one of the most incredible investment options.

Not only do these mutual funds help you tackle the monetary inflation rates, but some of them also help you obtain lucrative financial returns. It is impossible in the case of fixed deposits.

So what are you waiting for? Choose an online investment app and start investing money to achieve your financial goals!ย 

Shubh Maheshwari

A trading enthusiast who reads, writes, and is curious about life.

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