Debt Mutual Funds vs Fixed Deposits: Know Which is Better

Read on to discover which is a better investment option: Debt mutual fund or fixed deposit.
Debt Funds vs FD
3 mins
16 July 2024

When it comes to investing your hard-earned money, two popular options often come to mind: Debt Mutual Funds and Fixed Deposits. Both avenues offer different benefits and cater to specific financial goals. To make an informed choice, it is crucial to understand the core features, advantages, and tax implications of each option. In this article, we will delve into the comparison of Debt Mutual Funds and Fixed Deposits, helping you decide which one aligns better with your financial objectives.

Understanding Debt Mutual Funds and Fixed Deposits

  1. Debt Mutual Funds: Debt funds invest in short- and long-term assets such as treasury bills, government securities, debentures, commercial paper, certificates of deposit, and other securities issued by governments, public financial institutions, and businesses.
    The majority of an investment in a debt fund, also known as an income fund, consists of bonds and other debt instruments.
  2. Fixed Deposits (FD): Fixed Deposits, on the other hand, are a traditional and secure investment option offered by banks and financial institutions. They involve depositing a lump sum amount for a fixed tenure at a predetermined interest rate. FDs are characterised by capital protection, assured returns, and ease of investment. The interest earned on Fixed Deposits is fixed at the time of deposit, allowing investors to know the exact return they will receive upon maturity.

Debt Mutual Funds vs Fixed Deposits

  1. Returns and Risk: Debt Mutual Funds typically offer higher returns compared to fixed deposits, especially over the long term. While FDs provide fixed returns, Debt Mutual Funds' returns fluctuate based on the performance of the underlying debt instruments. Although Debt Mutual Funds carry some level of risk due to market fluctuations, they tend to offer the potential for better growth. The Bajaj Finance fixed deposit though is a combination of safety + returns. We have one of the highest [ICRA]AAA(Stable) and CRISIL AAA/STABLE ratings which assures that your deposit is safe with us. On top of that we also offer higher FD rates on our special tenures of 15, 18, 22, 30, 33, 42 and 44 months.
  2. Liquidity: Debt Mutual Funds are more liquid compared to Fixed Deposits. Investors can redeem their units partially or fully at any time, subject to exit load and redemption rules. In contrast, fixed deposits generally have a lock-in period, and premature withdrawals may incur penalties, affecting liquidity. The flexible tenure option of the Bajaj Finance FD solves for this since one can choose monthly, quarterly, half-yearly, and yearly interest payout options with us.
  3. Taxation: Taxation is an essential aspect to consider when choosing between debt mutual funds and fixed deposits. Returns from debt mutual funds held for over three years qualify for long-term capital gains tax with indexation benefit, resulting in lower tax liability. On the other hand, fixed deposits are taxed at the individual's applicable income tax slab rate.
  4. Loan against the investment tool: As per requirement, there is a option to take loan against your debt mutual fund as well as your fixed deposit. For loan against mutual fund, you can avail a loan of up to 80% of your fund value with Bajaj Finance. The same applies for Loan against Fixed Deposit with Bajaj Finance. For cumulative fixed deposit, loan of up 75% of your invested amount and 60% of your FD in case of non-cumulative FD.

Pro tip

Enjoy higher interest rate with Bajaj Finance Digital FD. Unlock returns of up to 8.65% p.a. by investing for 42 months via website and app.

Debt Funds Vs. Fixed Deposits - A Comparison Table

Criteria Fixed Deposits (FDs) Debt Funds
Returns Guaranteed returns No guaranteed returns
Risk Low Moderate
Liquidity Low High
Investment Expenditure No expenditure Expense ratio is charged

What Are the Benefits of Investing in Debt Funds?

  1. Low Risk: Compared to equity investments, debt funds are generally considered less riskier. They invest in fixed-income instruments like bonds and government securities, providing stability.
  2. Diversification: Debt funds offer diversification in investment portfolios, helping spread risk across different fixed-income instruments.
  3. Liquidity: Debt funds usually offer higher liquidity, allowing investors to redeem their investments more easily than certain fixed deposits or some government schemes.
  4. Professional Management: Managed by fund managers, debt funds benefit from professional expertise in selecting and managing a diversified portfolio of debt instruments.

Factors to Consider Before Investing in Debt Funds

  1. Risk evaluation: Understand the risks involved, including credit, liquidity, and interest rate risks. While debt funds generally have low credit risks, they aren't entirely free from interest rate fluctuations.
  2. Tax implications: Understand the tax implications of debt fund returns, as they are taxed differently based on the holding period.
  3. Expense ratio: Consider the fund's expense ratio, as lower expenses can enhance your overall returns.

What Are the Benefits of Investing in Fixed Deposits?

  1. Security: FDs are considered safe and reliable investments that offer a guaranteed rate of return. They are not linked to market forces, and the returns on FDs are fixed.
  2. Liquidity: FDs offer a high degree of liquidity, which is a great benefit for investors. They can be easily withdrawn before maturity by incurring a penalty.
  3. Easy to invest: Investing in FDs is a simple and hassle-free process that can be completed with minimal documentation.
  4. Compounding: Interest on FDs is compounded, which means investors earn interest on both the principal amount and interest earned. This compounding effect leads to a higher interest rate on your investment

Things to Consider Before Investing in FDs

  1. Interest rates: Research and compare interest rates offered by different banks or financial institutions. Higher rates usually lead to better returns on your investment.
  2. Penalty for premature withdrawal: Understand the penalty structure for premature withdrawals. Some banks charge a percentage of interest as a penalty, impacting your overall returns.
  3. Inflation: Inflation rates can impact the returns earned on your investment. Investors should choose an FD with a higher interest rate to ensure that their returns are not significantly affected by inflation.


The choice between Debt Mutual Funds and Fixed Deposits depends on your risk tolerance, financial goals, and investment horizon. If you seek stable returns with capital protection and easy liquidity, Fixed Deposits might be the preferred choice.

However, if you are open to some market risk and seek the potential for higher returns with tax efficiency, Debt Mutual Funds may be more suitable. Ultimately, diversification can be an effective approach, where you combine both investment options in your portfolio to balance risk and returns.

Calculate your expected investment returns with the help of our investment calculators

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Frequently Asked Questions

Where should I invest: FD or Debt Mutual Funds?

Debt funds have greater predicted returns and can pay a dividend. It also has low to medium risk and good liquidity. A low-risk investment with little liquidity and no dividend option is a fixed-term deposit (FD). Where you should invest will depend on your needs.

Is a debt fund better than a FD?

Debt funds offer returns akin to those of fixed-term investments. However, if you want a safe and secure investment choice, choose fixed deposits. If you have a high risk tolerance and are willing to take a chance for larger returns than FDs, you can invest in a debt fund.

What is the Digital FD offered by Bajaj Finance?

Bajaj Finance has launched a new FD variant called "Bajaj Finance Digital FD" for a period of 42 months. Bajaj Finance is providing one of the highest interest rates of up to 8.65% p.a. for senior citizens and for the customers below the age of 60 they are providing up to 8.40% p.a. The Digital FD can be opened and managed only through the Bajaj Finserv website or app.

Who should invest in fixed deposits?

Fixed deposits are suitable for individuals looking for a safe and low-risk investment option. They are ideal for conservative investors who prioritise capital preservation over higher returns.

What are the different types of debt funds?

Debt funds come in various types, including:

  • Liquid Funds
  • Short-Term Debt Funds
  • Long-Term Debt Funds
  • Gilt Funds
  • Corporate Bond Funds

Where do debt mutual funds invest?

Debt mutual funds invest in government bonds, corporate bonds, money market instruments, and other debt instruments.

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As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.