Fixed deposits (FD) guarantee fixed returns with predetermined interest rates for a specified tenor, making them a conventional investment choice. Renowned for their capital preservation attributes, FDs are often perceived as a safe choice for risk-averse investors.


On the contrary, debt mutual funds introduce an element of dynamism by investing in a diversified portfolio of debt instruments such as bonds and government securities. Managed by seasoned fund managers, these mutual funds navigate the intricacies of the market, responding to interest rate fluctuations and credit risk assessments to optimise returns.

Debt Funds vs FDs

The choice between debt mutual funds and FDs depends on various factors. These include your financial goals, risk tolerance, liquidity needs, and investment horizon. Let's compare the two:


Debt Mutual Funds

Fixed Deposits


Market-linked returns

Assured returns; fixed interest rate


Units can be redeemed on any business day

Premature withdrawal is permitted but subject to penalty

Dividend Option




Vulnerable to market volatility

Deposits are insured for up to ₹5 Lakhs by DICGC

Tax Implications

Capital gains are taxable

Interest earned is taxable as per the individual tax slab

Tax Benefits


Tax-saving FDs offer exemptions under Section 80C

Difference Between Debt Funds & Fixed Deposit

FD vs Debt Fund


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Frequently Asked Questions

What is the key difference between FD vs. debt mutual funds?

FDs are a traditional investment offered by banks with a fixed tenor and a predetermined interest rate. Debt mutual funds, on the other hand, invest in a mix of fixed-income securities and offer more flexibility in terms of tenor and liquidity.

Which investment option provides better returns: FDs or debt mutual funds?

Returns depend on various factors, including market conditions. Debt mutual funds have the potential for higher returns, especially over the long term, due to the market-linked nature of their investments. However, FDs offer fixed and guaranteed returns.

Are there any tax-saving options available in FDs and debt mutual funds?

Tax-saver FDs offered by banks are eligible for deductions of up to ₹1.50 Lakhs per financial year u/s 80C of the Income Tax Act, 1961.

How does liquidity differ between FDs and debt mutual funds?

FDs usually have a fixed tenor, and breaking them prematurely may attract penalties. Meanwhile, debt mutual funds offer more liquidity, allowing investors to redeem units partially or completely based on their needs.

Can I withdraw money before maturity in FDs and debt mutual funds?

FDs may have penalties for premature withdrawals. Debt mutual funds generally allow investors to redeem units at any time, but short-term redemptions may attract exit loads.

How are dividends taxed in Debt Mutual Funds?

Dividends from debt mutual funds are now taxed in the hands of the investor. Previously, the Dividend Distribution Tax (DDT) was applicable, but it was abolished in the Union Budget 2020.

Which offers higher returns between FD and debt funds?

Debt mutual funds have the potential for higher returns over the long term, but past performance isn't guaranteed. Whereas, FDs offer fixed, predictable returns.

How easy is it to access my money with FD and debt funds?

FDs usually lock your money for a fixed term. Most debt funds are open-ended, allowing faster redemption (except close-ended funds).

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