Debt Funds Vs Fixed Deposit


Debt funds are mutual funds that invest in fixed-income assets such as bonds and treasury bills. These funds provide a variety of investment choices, including gilt funds, monthly income plans (MIPs), short-term plans (STPs), liquid funds, and fixed maturity plans (FMPs). Debt funds are categorised into different types.

Fixed deposits, on the other hand, are investment avenues that offer returns based on a predetermined rate of interest over a specific period. Banks provide depositors with the option of investing their money for durations ranging from seven days to ten years, which varies across different financial institutions.

Debt mutual funds vs fixed deposits – Differences

Parameters Debt funds Fixed deposits (FDs)
Risk Involved Even though debt funds invest in fixed-income instruments, investors might need to accept some risk. The average tenure is critical. FDs provide investors with guaranteed returns, and the quoted interest you get does not fluctuate depending on how the market performs. Minimal risk when compared to debt funds.
Returns Debt funds offer lower returns than equities. However, financial experts say they have the potential to outperform FDs in terms of returns – although this is dependent on how the market performs. The returns offered by FDs are typically dependent on the current market rates.
Liquidity You can redeem your debt fund assets at the current NAV, which may be lower or greater than the amount you originally deposited. There is also an exit burden in this type of redemption.


In the case of a tax-saving FD, depositors must hold their money for five years. In some instances, though, you can remove funds from your FD account early for a penalty.



Debt funds are not exempt from taxes. The tax charged on debt mutual funds is based on the short-term and long-term capital gains. A debt fund’s long-term capital gains are taxed at a fixed rate of 20 per cent.

By investing in a tax-saving fixed deposit account, each investor can claim a maximum deduction of Rs. 1.5 lakh per year. The interest you earn is taxed.


Investment method In debt funds, there are multiple options available. One can make deposits in lump sum or choose a systematic investment plan. You can invest in an FD by depositing a lump sum with a bank or a non-banking financial institution. Both online and offline options are available.

Are debt funds better than FD?

Traditionally, a fixed deposit has been an essential part of almost every Indian investor’s portfolio. In recent years, mutual funds have managed to gain popularity.

When compared to fixed deposits, debt funds are more tax-efficient and have more benefits. If you are in a higher tax band and have a longer investment horizon than three years, debt funds could be a better option than bank FDs.

While both investment avenues have their unique features and drawbacks, it is up to you as an investor to decide which one to opt for based on your investment goals, horizon and risk appetite.