What Will be Better, a Mutual Fund or a Fixed Deposit?

Fixed deposits have been the safest investment option for decades. However, in the last decade, mutual funds have gained immense popularity, even among the elderly. Both fixed deposits and mutual funds offer great benefits. Before deciding if you should open a fixed deposit or invest in mutual funds, it is very important to understand how these two financial products work 

Things you should know about mutual funds 

If you are willing to take financial risks and are looking for high returns on your investment, you must consider mutual funds. Mutual funds refer to a pool of money accumulated from many investors who all aim at creating a strong savings and investment portfolio. The corpus of money is then invested in multiple assets. There are many types of mutual funds. The risk that you take differs from one mutual fund to another. The profit earned or loss incurred through such investments is shared among all the investors in a pre-determined proportion.  

You can invest in a mutual fund by paying a lump sum amount and buying a policy or you can plan your investments by opening a Systematic Investment Plan (SIP). A SIP will allow you to invest a fixed amount of money in pre-determined intervals, usually monthly. You can choose tax saver mutual funds or SIPs if your aim is to save on taxes.  

Things you should know about fixed deposits 

Fixed deposits (FD) is one of the most popular investment options among the previous generation. It allows you to invest a lump sum amount for a fixed period of time and at a fixed interest rate. You can open a fixed deposit for a short period as 7 days and up to 10 years depending on the bank.   

Each bank offers a different interest rate on their fixed deposits. The interest rate offered on fixed deposits changes from time to time. The interest rate that you can earn on fixed deposits depends on the tenure of the FD and the amount deposited. You will earn a high rate of interest if you deposit a huge amount for a longer period of time. The interest rate will be low if you deposit a small amount for a shorter period of time. Almost all banks offer special interest rates for senior citizens.  

When you open a fixed deposit, the interest rate will be communicated to you by the bank. During the tenure of the FD, even if the prevailing interest rates go up or down, you will be entitled to the rate of interest that was promised to you when you first made the deposit. You can choose to get the interest rate earned on a monthly or quarterly basis. You can also choose the reinvestment scheme where the interest earned on your FD will be reinvested into the fixed deposit account. 

You can visit the bank you have a bank account with and open a fixed deposit. However, to make the process easy, banks now allow you to open an FD online through net banking or through phone banking. Most banks allow you to open an FD with them even if you do not have a bank account. However, a few banks may insist to open a savings account before opening an FD with them. 

You can close your fixed deposits before the maturity date. However, the bank may charge a penalty and the interest rate payable will be subjected to a penal rate of interest as decided by the bank. However, if you have a tax saver fixed deposit with a clause that you cannot Pre-close the FD, you will wait till the FD matures. While most banks allow you to close your FD account online or through netbanking, a few lenders may request you to pay a visit to the bank. If you are someone who does not wish to take financial risks, you can choose to open a fixed deposit.  

Mutual funds versus fixed deposits 



Mutual funds 

Fixed deposits 

Return on investment 

14% to 25% (Depending on the type of mutual fund you choose) 

5% to 9% (Depending on the type of fixed deposit you open) 

Type of earnings 




High or moderate 


Payment frequency 

One –time payment for mutual funds 

You can choose monthly payments for SIPs 

One-time lump sum deposit 

Auto-debit facility 

Available for SIPs 

Not applicable as a one-time deposit is made to open an FD 

Pre-mature withdrawal 

Allowed after the minimum holding period. Exit load charge will be levied if you make a withdrawal before the minimum holding period. 

Pre-mature withdrawals are allowed. However, you will be required to pay a penalty.  


The bottom line 

Before you choose to open a fixed deposit or invest in a mutual fund, consider the following factors: 

  • Your risk appetiteConsider your financial position and ask yourself if it is wise to take risks. If you are willing to take risks to maximise your profits, choose a mutual fund based on the level of risk you can take. If you are not willing to take any financial risks but would love to earn interest, you may open a fixed deposit account.  

  • Your future expensesBefore choosing between fixed deposits and mutual funds, predict your expenses. If you have a huge financial commitment coming up, it is wise to select a financial product that does not penalise you if you liquidate it. 

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