Mutual Funds vs Fixed Deposit: Returns, Risks And Which One To Choose In 2025

Indian investors have traditionally favoured FDs over any other investments due to the low risk, fair returns, and ease of investment. FDs are offered by banks and financial institutions with significant goodwill, and they have been in use for decades. On the other hand, the popularity of Mutual Funds has gained tremendous momentum in recent years. 

The total AUM (Asset Under Management) of mutual funds in India has grown from INR 11.73 trillion as on June 30, 2015, to INR 74.41 trillion as on June 30, 2025¹. 

Both alternatives have their pros and cons. It is important to consider your risk tolerance and investment goals before investing in any of the options. 

This article breaks down the key differences between FDs and mutual funds, compares returns, risks, taxation, and suitability, so you can make an informed choice this year.

FD vs Mutual Fund: What Is The Difference?

A few months ago, after a major stock market correction, social media was full of a joke: a middle-aged dad was showing his FD returns (7-8% per annum) to his son, whose mutual fund and equities portfolio was depicting negative returns. Investors are not just looking for returns, but also for the right mix of safety, liquidity, and tax efficiency, making this choice a crucial one.

The biggest difference between the two lies in how the returns are generated. FDs offer fixed and guaranteed returns irrespective of the market conditions. If you are a conservative investor with little to no risk tolerance, it is an excellent alternative for you. On the other hand, mutual funds are market-linked, meaning their performance depends on the underlying securities: equities, debt instruments, or both. This makes mutual funds extremely volatile, but at the same time, capable of beating the market inflation. 

Another critical factor is risk. FDs guarantee the safety of the principal amount and the interest, making them risk-free due to the backing of large banks. Mutual funds, on the other hand, carry the risk of market fluctuations: the value of your investment can rise or fall. However, if you keep your investments longer, the market volatility is adjusted and the chances for you to earn higher returns increase. 

Here is a quick comparison table between the two investments:

Returns: Is the Extra Risk In Mutual Funds Worth It?

Investments work on a risk-return paradox. If you are willing to take a higher risk, the chances of you earning higher returns will increase. If you want to play safe, you will end up with returns that might be considered decent, but most often would be insufficient to beat the inflation rate. While FDs offer steady returns, usually around 6–7% per annum, they barely beat inflation in the long run. Mutual funds, especially equity-oriented ones, can deliver 12–15% annualised returns over longer investment horizons.

A few mutual funds indeed offer returns up to 12-15% per annum, almost double that of FDs. However, the timing of entry and exit in mutual funds is critical. If you have entered the mutual fund market at an all-time high and exited at a low, the average return could be even less than that of an FD. If you are willing to accept the volatility of the market, mutual funds are an excellent alternative. However, if you prefer predictability, the best alternative is Fixed Deposit.

Let us take an example-

You have INR 1,00,000/- to invest for 5 years. You have the option to choose an FD at 7.5% per annum (compounded annually) or invest in a mutual fund, which offers irregular returns each year. The MF provided 6%, 23%, 6%, 14% and 18% returns each year. The comparison of the returns shall be as follows:

Chart 1.0: MF vs FD returns

Eventually, the choice is yours as to which option you wish to select for investment. It depends on the purpose of the investment and your risk profile. 

Tax Efficiency: Which Saves You More Money?

There is a bit of an edge for mutual funds here. Fixed Deposits are fully taxable at your income slab rate, with TDS deducted if interest exceeds INR 40,000 (INR 50,000 for seniors) annually. For high earners, this can eat into returns, making the real yield even lower than inflation. MFs are much more tax-efficient, and it is possible to do better tax planning as they are categorised under capital assets. 

If held for more than a year, long-term capital gains (LTCG) on equity funds are taxed at just 10% beyond INR 1 lakh, and short-term gains at 15%. However, the rules for debt mutual funds changed in April 2023. They no longer enjoy indexation benefits, and all profits, irrespective of holding period, are taxed at your slab rate, much like FDs (all debt funds are considered short-term, regardless of the holding period).

When To Choose Mutual Funds And When To Pick FDs

Now that you understand the differences in returns, risk, and taxation, the right choice depends on your financial goals and time horizon.

Choose Fixed Deposits (FDs) if you are looking to build an emergency fund or need a safe place to park short-term savings. FDs offer capital protection, fixed returns, and moderate liquidity. While they do carry a small penalty for premature withdrawal, they are ideal for funds you might need on short notice, such as during a medical emergency, temporary job loss, or urgent repairs.

FDs are also suitable for highly risk-averse investors or senior citizens who prefer stable income over market-linked returns. Additionally, tax-saving FDs with a 5-year lock-in offer deductions under Section 80C (up to INR 1.5 lakh), though the interest is taxable.

Choose Mutual Funds if your goal is long-term wealth creation. Whether you are planning for a child's education, retirement, or buying a home, mutual funds, especially equity and hybrid funds, offer the potential for higher inflation-adjusted returns. SIPs (Systematic Investment Plans) also bring in investment discipline and benefit from rupee cost averaging and compounding over time.

Debt mutual funds, on the other hand, may be suitable for medium-term goals with slightly better tax efficiency (especially if held over three years) compared to FDs.

The bottom line:

Pick FDs for capital safety and short-term needs. Go with mutual funds for long-term growth and financial goals. A smart portfolio often includes a mix of both to balance risk, returns, and liquidity.

Now Invest In Mutual Funds Directly On Grip Invest

Whether you are leaning towards equity mutual funds for long-term growth or debt funds for medium-term stability, you can now invest in mutual funds directly through Grip. The platform offers a curated selection of mutual funds, including Liquid, Dynamic Bond, Short Duration, and Credit Risk funds, alongside its existing fixed-income options like bonds, SDIs, and FDs.

You can start with just INR 100, pay zero commission, and choose from top AMCs that have been vetted through Grip’s due diligence process. Whether it’s SIPs or lump sum investments, everything is available in one place, simplifying your investment journey while helping you stay aligned with your financial goals.

Conclusion

FDs suit short-term, low-risk goals, while mutual funds excel at long-term wealth creation with higher returns. For those looking for a balanced approach, combining safety, returns, and liquidity, diversifying across both options can be a smart strategy. Align your investments with your risk appetite, time horizon, and financial objectives and explore curated options on Grip Invest to make smarter choices in 2025.

FAQs On Mutual Funds vs Fixed Deposits

1. Can mutual funds give better returns than FDs?

Yes, mutual funds, especially equity-oriented ones can deliver significantly higher returns than FDs over the long term, though they carry higher risk and short-term volatility.

2. What is the tax on mutual funds vs fixed deposits?

FD interest is taxed at your income slab rate. Mutual fund gains are taxed as capital gains: equity funds enjoy lower rates if held over a year, while debt funds (post-April 2023) are taxed like FDs.

3. Should I use mutual funds for short-term savings?

Not ideal. Mutual funds, particularly equity ones, are better for long-term goals due to short-term volatility. For short-term needs, FDs or liquid/ultra-short debt funds are safer options.

References:

1. Association Of Mutual Funds In India, accessed from: https://www.amfiindia.com/indian-mutual

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