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Mutual Fund vs Fixed Deposit: Which One to Choose?

| November 4, 2025

Mutual Fund vs Fixed Deposit: Which One to Choose?

With time, we have all understood that investment is the key to building wealth and securing our future. Among the wide range of investment options available today, two of the most popular choices are mutual funds and fixed deposits (FDs). While both mutual funds and fixed deposits are designed to help you grow your savings, they work differently and have their own pros and cons.

Table of content

What is a Mutual Fund?
Benefits of Investing in a Mutual Fund
What is a Fixed Deposit?
Benefits of Investing in a Fixed Deposit
Key Differences Between Fixed Deposit (FD) and Mutual Fund
FD vs Mutual Fund: Which is Better for You?

To help you, here is all you need to know about mutual funds vs FDs and which you should invest in:

What is a Mutual Fund?

Mutual funds are a type of investment where authorised institutions, such as banks and asset management companies, pool money from multiple investors to purchase a diversified portfolio of securities, such as stocks, bonds, or other assets. This portfolio is managed by a finance manager, also known as a fund manager, who invests based on the fund's objective. There is no minimum or maximum amount in mutual funds; you can start investing as low as RS. 500 per month.

Suggested Read: Understanding How Mutual Funds Work: A Complete Guide

Benefits of Investing in a Mutual Fund

Diversification: Mutual funds are spread across various investments, reducing the risk of having all the funds in one place.
Liquidity: Mutual funds are highly liquid, which means they can be converted into cash quickly and easily.
Professional management: Mutual funds are managed by skilled fund managers, who make informed decisions to maximise returns.
Profit potential: Mutual funds have the potential to offer your great return on investment, allowing you to grow your wealth slowly and steadily.
Convenience: The process of investing in mutual funds is quite simple and hassle-free, making them accessible to individuals.

What is a Fixed Deposit?

Fixed Deposit or FD is a form of investment where you deposit your money for a tenure of your choice at a fixed interest rate. It is a great investment option, especially for beginners with a low appetite for risk, offering assured returns regardless of market fluctuations. Compared to regular savings accounts, FDs offer a higher return on investment. You can open an FD at a government bank or any NBFC.

Benefits of Investing in a Fixed Deposit

Low risk: FDs carry low risk as they are not influenced by market fluctuations.
Stable returns: FDs have a fixed return, providing predictable and stable returns on your investment.
Good for recession period: FDs remain unaffected by economic conditions, making them a good investment choice during recessions.
Ideal for short to medium-term goals: FDs are ideal for achieving your short to medium-term financial goals, such as buying a car, funding education, or planning a vacation.
Ease of investment: FDs generally require minimal effort to set up and maintain, and also cater to various investors' preferences.

Key Differences Between Fixed Deposit (FD) and Mutual Fund

Here are some key differences between fixed deposits and mutual funds:

Parameter	Fixed deposit (FD)	Mutual fund
Returns	Fixed returns as per the predetermined interest rate	Potentially for high returns. Market-linked returns that are subject to fluctuations
Investment mode	Lumpsum investment	Lump sum or SIPs
Risk	Low risk with guaranteed returns	Moderate to high risk depending on fund and market fluctuations
Liquidity	Moderate liquidity; premature withdrawal can incur a penalty	High liquidity; easy to invest and redeem.
Tax Benefits	Interest taxable as per the income tax slab	Long-term capital gains tax: 10% on gains above exemption limits; short-term gains are taxed as per the slab
Lock-in period	Lock-in based on chosen tenure	No lock-in period
Fund management	Not actively managed; the interest rate is fixed at the time of deposit.	Managed by professional fund managers.
Expenses	No expense	Expense ratio charged (typically 1-2%)
Best for	Suitable for risk-averse investors	Suitable for investors with mid to high risk appetite

FD vs Mutual Fund: Which is Better for You?

The choice between FD Vs. Mutual fund ultimately depends on your personal preferences, financial goals, and risk appetite.

You should choose FDs if:

You prefer predictable and steady returns
You are a beginner with a low risk appetite
You have a short-to-medium term goal
You need a stable and assured income stream
You have a lump sum of money to invest

You should choose mutual funds if:

You are willing to take risks for potentially higher returns
You have long-term financial goals
You want a diversified investment managed by professionals
You seek liquidity
You prefer disciplined investing

Instead of choosing one between FD and mutual funds, some people also invest a part of their savings in FDs for stability, and the remaining in mutual funds for growth. This approach helps balance safety and returns.

In conclusion, both mutual funds and fixed deposits have their own advantages and disadvantages. While FDs offer stability and assured returns, mutual funds give you potential for higher returns with some market risk. The right choice for you ultimately depends on your preferences, financial goals, and risk appetite.

Ready to start your investment journey? Muthoot Finance offers a wide range of best-return mutual fund options, helping you find the perfect fit for your financial goals. Visit our website or consult with our financial experts for personalised guidance.