Debt Fund Vs. Bank FD: Is Debt Mutual Funds Better Than Bank FD?

Bank FD or Fixed Deposit is one of the popular investment options in the financial market. Fixed deposit is very secure and can be used to invest money from one week to 15 years and even more. In recent years the interest rates on fixed deposits have decreased, but still, many banks and NBFCs are offering 5% to 7% interest rates. 

Debt Fund Vs. Bank Fd


However, if you are an aggressive investor willing to earn higher interest with little risk, you might have heard about debt mutual funds. It's a mutual fund where most of your money is invested in debt securities, ensuring high and secure returns. 


Let us get a close look at debt funds and fixed deposits and understand which investment option is better.  

Difference Between Debt Funds and Fixed Deposit (FD)

Below there is a comparison of bank FD and debt mutual funds. 



Debt Mutual Funds (Debt Fund)


Fixed Deposit (FD)


Lump Sum vs. Installment


Both lump sum and installment options are available


Only the lumpsum investment option is available


Risk level 


Riskier than fixed deposit


Carry no risk




Higher liquidity 


Lower liquidity 




Nominal processing or expense ratio can be charged


There are no such charges on fixed deposit




Up to 9%


Up to 7.5%



Debt Fund vs. Bank FD: Which is the Better Investment Option?

Below there is a comparison between fixed deposit and mutual debt funds. Go through each point to know which investment option can be the right fit to achieve your financial goals. 



Fixed deposit is one of the risk-free investment options available for teenagers, adults, and even old people. You get a fixed rate of return on the invested amount. There is no effect on return even if the bank defaults, as deposits are protected by DICGC insurance with a maximum limit of Rs 5,00,000. 


On the other hand, debt funds carry little risk because the interest rate on invested money can fluctuate based on economic conditions. However, the risk associated with debt mutual fund investment is far less than other securities like equity mutual funds or share market investments.  

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While investing in bank FD, you must deposit a lump sum amount and select the lock-in period from the given option. Debt mutual fund investment gives you a lump sum and a SIP investment option. If you have sufficient funds, you can make a lump sum deposit. You can also choose a systematic investment plan based on your monthly budget.  


Generally, FD has a fixed lock-in period, which can be one week to 15 years. However, 1-yearly and 5-yearly fixed deposit plans are the most common. The bank levies the penalty if you wish to withdraw invested money in a fixed deposit before maturity. 

In the case of a debt fund, there is not any fixed time to invest your money. But when you withdraw the money, there can be some charges to pay from your side. Remember, not all debt funds put charges when withdrawing funds; you must check out the terms and conditions before investing in it.  

FD vs. Debt Fund Taxation

There is no tax burden on a fixed deposit if the earned interest on the fixed deposit, along with your total taxable income, comes in a basic exemption limit. In debt funds, the gains are classified as short-term and long-term gains. 

If you hold a debt fund for three years or less, it comes under short term gains, where your income is taxed based on an income tax slab. If you put your money in a debt fund for more than three years, it is considered long-term capital gains and taxed at 20% with indexation.  

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IS Debt Fund Safer Than Bank FD?

Debt Mutual Funds are riskier because of reliance on market conditions. Whereas fixed deposits offer guaranteed returns on the invested money, even if the bank defaults. So, before investing in any investment option, it's worth researching and cross-checking various fixed deposit schemes and debt funds to figure out which suits well for your investment habit.  

Which is Better Fixed Deposit or Debt Funds?

A fixed deposit is the better option if you want a secured and guaranteed return and don't want to bear extra risk. Although debt mutual funds are a great option if you don't have a lump sum amount to invest or you can bear a little risk to maximize your earning potential.


The minimum SIP for debt fund investment can start from as low as Rs 500, making it suitable even for working professionals with less budget to start investing. So, before making an investment decision based on your risk level, financial goals, and availability of funds. Hopefully, you have understood the difference between fixed deposits and debt mutual funds. 

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