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You must continue to accept some risk, although debt funds invest in fixed-income securities. FDs have various advantages, including guaranteed returns for investors and constant quoted interest rates regardless of market performance. Everything is based on the interest rate you decide to lock in with while making your initial deposit. The table below will give you a clear idea of certain particulars of debt MF vs FD:


Debt Funds

Fixed Deposits

Estimated Rate of Returns



Dividend Option




Low to Moderate





Investment Expenditure

A nominal expense ratio is charged

No management costs

Things to Consider While Investing in Debt Funds

A debt mutual fund's main objective is to provide you with a consistent income throughout the investment period. To receive these benefits, you are required to select a specified time frame. The economy and its changes impact debt funds. Debt mutual funds carry less risk than equity funds since they invest in fixed-income securities with established interest rates and maturity values. This is because your returns will fall within a reasonable range, notwithstanding market fluctuations.  


The following are factors to take into account while investing in debt funds:

  • You need to be informed of and consider the dangers posed by debt funds.

  • You must determine which form of debt funds would best fulfil your financial objectives. Debt funds do not assure returns, therefore you must decide if you want to choose debt funds or not.

  • You need to decide whether or not you want another source of earning with risk factors or not because debt funds can be thought of as an additional source of income to supplement regular pay income.

  • To manage funds, debt fund managers are paid a management fee.

  • It is advisable to research various debt fund sources and the services they provide before investing in them.

  • Making contact with a professional can assist you in better comprehending the foundations of debt funds, investment options, eligibility requirements, etc.


fd vs debt

Taxation Regulations: FD vs Debt Funds

Even though debt funds and fixed Deposits are debt instruments, there are some differences in how the taxes are applied. The most important difference is when the returns are taxed.


With FDs, the interest that is earned is subject to tax for the particular financial year. 


The entire interest amount you get from fixed deposits in a year has to be declared in the IT return under "Income from Other Sources", whereas, for debt funds, the returns are only taxed when redeemed. This is known as deferred tax treatment.


Other than this difference, for holding periods of less than 3 years, there is no difference between how a debt fund and FD works. You will be taxed as per the rate of your IT slab, and the returns will be added to the income.


If the holding period is more than three years, the FD taxation is the same, while the rules for debt funds taxation change. This is because debt fund gains come under capital gains, and capital gain rules differ for various holding periods.

Difference Between Debt Funds & Fixed Deposit

FD vs Debt Fund

The importance of mutual funds has increased over the past few years. As a result, FDs are no longer the most sought-after long-term investment options. The opportunity presented by the lower deposit return rates at the time of the 2016 demonetisation has been seized by mutual funds. The availability of mutual funds, which also save on taxes, increased their popularity. As debt funds started to offer higher rates combined with liquidity, many low-risk investors started to leave them. Here’s more on FD vs Debt Mutual Funds.

  • FD

When doing a debt mutual funds vs fixed deposits comparison, note that the money you place into a fixed deposit is locked in for a specific amount of time. Banks allow depositors to invest their money across a range of tenors, from seven days to ten years. The rate of interest is one significant distinction between debt fund vs FD. The length of time your investment is placed with a financial institution determines the rate of interest for an FD. A fixed deposit is an investment option provided by banks and NBFCs to assist you in creating sound financial practices and increasing your wealth simultaneously. An FD requires a one-time lump sum investment for a specific period. You can receive the interest regularly or all at once when the deposit reaches maturity.

  • Debt Funds

A debt fund invests in fixed-income assets such as government bonds, corporate debt securities and other money market instruments. Each instrument has a predetermined maturity date and a potential interest rate. As a result, they are known as fixed-income securities. As you read more on debt mutual funds vs FD, note that debt securities are low-risk investment options since returns from investments made through debt mutual funds are typically unaffected by market movements.

Which Investment Should You Consider?

Based on the above facts, you can now choose whether you should invest in an FD or a debt mutual fund. An FD is your safest alternative, even though debt mutual funds have a low-risk component. The level of risk is the primary distinction between debt mutual funds and fixed deposits. If you'd like to lower your risk, an FD is a secure investment. FDs are a valuable financial tool because they are available to everyone and are simple to open.


The information provided by BFDL herein above is related to the Non-Partnered Banks/ NBFCs and is just for the purpose of information and under no circumstances the information provided hereinabove is intended to be source of advice or recommending any financial investment advice or endorsement of any sort

The information including interest rates with regard to fixed deposit, provided on this website is gathered through publicly available sources over the internet and is considered as accurate and reliable to the best of our knowledge. BFDL disclaims any responsibility or liability regarding inaccuracies, omissions, mistakes etc. as well as offers by the Non-Partnered Banks. The use of information set out is entirely at the User’s own risk and User should exercise due care prior taking of any decision, on the basis of information mentioned hereinabove. You are advised to visit/ contact the respective Banks/ NBFCs to verify the information before making any investment or opening an account. Further, BFDL does not undertake any responsibility or liability to update this information. YOU ARE SOLELY RESPONSIBLE FOR ANY LIABILITY OR DAMAGE YOU INCUR THROUGH ACCESS TO OR USE OF THE SITE OR SUCH INFORMATION OR MATERIALS EXCEPT WHERE THE LAWS AND REGULATIONS OF A PARTICULAR JURISDICTION CONCERNING WARRANTIES CANNOT BE WAIVED. Additionally, display of any trademarks, tradenames, logo and other subject matters of intellectual property owners. Display of such Intellectual Property along with the related product information does not imply BFDL’s partnership with the owner of the Intellectual Property of such products. 

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Frequently Asked Questions

Debt funds are more tax-efficient than fixed deposits. After considering the benefits of indexation, capital gains in debt funds held for more than three years are subject to a 20% tax. Your taxable income is increased by the interest on your bank deposits, which is then taxed at your individual tax rate. Therefore, debt funds are preferable if you want to reduce your tax obligations.

Debt mutual funds' main advantage is that they are more tax-efficient than FDs. You may receive short-term capital gains when redeeming your debt funds with a holding period of three years or more.

The returns on debt MFs may be higher than the returns on FDs, which pay back the principal plus any interest that has accrued. Debt MFs offer an expected return of between 7 and 9 percent, while the projected return on FDs is between 6 and 8 percent.

An FD account's interest is taxed at your slab rate. If the interest earned over a financial year is greater than ₹40,000, the TDS rate on your FD would be 10%. Senior citizens, on the other hand, are eligible to deduct interest up to ₹50,000 annually. In debt mutual funds, short-term capital gains are taxed at the investor's marginal tax rate (assuming units are sold within three years).

Debt funds can offer a dividend and have higher expected returns. Additionally, it offers good liquidity and low to medium risk. A fixed-term deposit (FD) is a low-risk investment with limited liquidity and no dividend option. Your needs will determine where you should invest.

Since debt fund returns are market-dependent, investment in this strategy carries some risk.

For investors with short-term or medium-term investing objectives, debt funds are suitable. Investors with a high-risk tolerance may want to consider these funds. A person with extra money can put it into debt funds. For investors wishing to diversify their portfolio, debt funds are an alternative.

Debt funds give returns similar to that of a fixed deposit. However, if you have a high-risk appetite and are ready to take a risk for higher returns than FD, then you can invest in a debt fund but if you want a guaranteed and safe investment option then opt for fixed deposits.

Even though debt funds are not entirely risk-free and have their own share of risks, they are considered to be an excellent investment instrument provided there is a certain degree of caution that is exercised when choosing the right debt fund.

Debt funds make profits by investing in fixed-income securities and bonds.The returns that you would receive is purely based on the interest income.


Debt fund managers invest in various bonds whose prices will fluctuate depending on the economy. If the debt fund managers purchase a bond and its price rises, then it will make extra money above and beyond the interest income.

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