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Fixed Deposits vs Income Funds

While planning your financial investments, you must always look at building a well-diversified portfolio by investing across various categories like fixed deposits, mutual funds, etc. Each of these has its set of pros and cons. So, as a responsible investor, you must analyse each investment option and compare them with the others before you decide to invest.
In this article, we will compare two such investment options- income funds vs fixed deposits- and understand which one is suitable for you. Let’s get started.

What are Fixed Deposits?

Fixed deposit, or term deposit, is a financial instrument offered by banks and NBFCs (Non-Banking Financial Companies) at a higher rate of interest than a savings account. Here you, as an investor, choose to deposit a sum of money at the financial institution for a specified tenor and earn interest on this amount at a fixed percentage for the said duration. This interest remains unaffected by market fluctuations and you end up getting guaranteed returns after the maturity of the fixed deposit. You can choose to get your interest income on a periodic basis or at maturity. In terms of tax treatment, interest earned from fixed deposits is taxed as per your income slab.

What are Income Funds?

Income funds are mutual funds that primarily focus on generating income on a regular basis (monthly or quarterly). They do this by investing in government securities, corporate bonds, certificates of deposit, money market instruments, debentures and stocks that generate high dividends. Income funds are actively managed by experienced fund managers who aim to generate high returns during varying interest rate cycles. When it comes to the tax treatment, long-term capital gains from income funds attract a 10% tax without indexation, and 20% with indexation.

Fixed Deposits & Income Funds as Investment Options 

Income Funds vs Fixed Deposits


Income Funds

Fixed Deposits

Safety of funds invested



Return on investment

Fluctuating returns on investment

Fixed returns on investment

Terms of withdrawal

Can be withdrawn without any penalty

Premature withdrawal is possible with a penalty

Tax efficiency

Long-term capital gains from income funds attract a 10% tax without indexation, and 20% with indexation

Interest earned from fixed deposits is taxed as per your income slab


Suitable for you if you are willing to take a low risk to earn extra returns

Suitable if you are a risk-averse investor

Let’s compare both these investment options based on factors like the safety of funds, return on investment, and the terms of withdrawal.

Safety of Funds Invested

A fixed deposit of up to ₹1 Lakh is insured. So, if a bank defaults, you (the investor) are given a principal amount of up to ₹1 Lakh, depending on the sum deposited in the fixed deposit and the insurance cover. Thus, fixed deposits are considered a safe investment option.


Income funds are susceptible to volatile market rates that can lead to a fall in the fund value. There is also the risk of a bond issuer defaulting on payment, which can affect the returns of income funds.

Return on Investment

Fixed deposits have fixed rates of interest and are often not subject to market turmoil. This makes it easy for you as an investor to calculate the assured returns on your investment. You can use the fixed deposit interest rates calculator to determine the same. On the other hand, income funds do not offer any fixed rate of interest and are subject to market volatility. Hence you cannot expect any guaranteed return on investment from income funds.

Terms of Withdrawal

Fixed deposit investments have a stipulated lock-in period. Hence, you cannot withdraw the invested amount before the maturity date. In case you need to withdraw the amount before maturity, you may have to pay a penalty for premature withdrawal of FD.


Income funds do not have a lock-in period. This means that you can withdraw your investments at any time without losing out on your interest. However, some funds may charge an exit-load on your sell-off.


Now that we have compared income funds vs fixed deposits, you know what’s right for you based on your risk appetite and various financial goals. And if you are looking at investing in fixed deposits, you must check the fixed deposits by Bajaj Finance at Finserv MARKETS. Bajaj Finance fixed deposit comes with one of the best fixed deposit interest rates as high as 8.10% that can help you grow your money rapidly. With great liquidity and flexibility, you can take a loan against your Bajaj Finance fixed deposit and tend to any financial expenses in the case of an emergency.


  • ✔️Who can invest in fixed deposits?

    The following categories of people can invest in a fixed deposit:

    • Residents

    • Minors (through their guardian)

    • Hindu Undivided Family (HUF)

    • Family Trusts

    • Group Companies, Limited Companies, Partnership Firms

    • Sole Traders

    • Associations, Clubs and Societies

  • ✔️What is the investment tenor I can choose for fixed deposits?

    You can invest in fixed deposits with an investment tenor ranging from 1 year to 5 years.

  • ✔️What is the minimum deposit amount in a fixed deposit?

     The minimum deposit amount in a fixed deposit is ₹ 1,000. However, this may vary for different banks.

  • ✔️Can I get a monthly income from income funds?

    Yes, you can opt for a monthly income plan while investing in income funds and receive regular periodic (monthly, quarterly, half-yearly) dividend payouts.

  • ✔️What is the ideal investment period for income funds?

    Ideally, you should invest in income funds with an investment horizon of 3 years or above to really benefit from these funds.