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Considering the cyclical nature of an economy, the one thing investors are always worried about is the risk involved, when it comes to getting their returns on investment. While investing money via Fixed deposits (FD) has been the go-to for most investors in the past, a significant shift to investing money via Debt Mutual Funds has been noted of late. 

For the uninitiated, there is a big difference between debt mutual funds and fixed deposit. Here, we explain both to help you understand which is your best investment option

The first thing to address here is to address the very meaning of investing via a fixed deposit and investing via a debt fund. When you invest money via a fixed deposit, you put forth a large sum of your money in your registered bank for a fixed tenure, at an agreed rate of interest. 

At the end of this tenure, you are then guaranteed a return of the money you had invested, along with the compounded interest. Debt funds, on the other hand, are a form of mutual funds, which invest the money you put forth into fixed income Government securities like treasury bills and Corporate securities like bonds.

Debt funds offer potential investors a variety of mutual fund categories through which they can invest, and also offer them funds through which they can invest in short, medium and long-term bonds.

So, which best investment option when it comes to debt mutual funds vs fixed deposits?

There are various factors that need to be considered while taking this decision. To help you take a well-calculated investment decision, here’s a breakdown of the popular Debt Funds vs Fixed Deposits debate.

What are Debt Mutual Funds?

Debt funds invest primarily in fixed-income securities such as government securities, corporate bonds, treasury bills, commercial paper, certificate of deposit and other money market instruments. Debt funds provide better returns than fixed deposits or savings account deposit interest and other investment options of a similar category.

Due to the liquidity of funds, these Debt mutual funds or liquid funds become  attractive for any investor

Debt Funds Vs Fixed Deposits (FD): Key Differences

The following table summarizes the key differences between debt funds and fixed deposits:

ParametersDebt FundFixed Deposit
RiskLow RiskNo Risk
Deposit FrequencyLumpsum or SIPLumpsum
ReturnsMarket linkedFixed returns
Taxes Charged on maturityCharged on interest earned
Premature withdrawalAllowed but depends on the exit load conditionsAllowed with penalty charges
Dividend BenefitYesNo

Difference Between Debt Funds and Fixed Deposits

Rate of Returns

Fixed deposits usually offer guaranteed returns on investment, irrespective of the market performance but come with a lock-in period. However, the returns are usually at a fixed rate, unlike debt funds. This means, that if the rate of interest falls, an investor will still only get back a fixed amount based on a fixed rate of interest.

Whereas in a debt mutual fund, an investor will get back a higher sum since the fund depends on the current rates in the market, among other things. Debt funds do not have a fixed return, which is why many market experts believe that they have the potential to offer higher returns than fixed deposits. 

Simply put, while debt mutual funds can offer an investor a higher rate of returns, especially post tax, a fixed deposit assures the investor more or less a fixed rate of return.


Another major factor that an investor needs to consider, is liquidity. Debt Funds offer higher liquidity. You can redeem units anytime. When it comes to fixed deposits, premature withdrawals attract 1% penalty. You either have to break into your fixed deposit account or take a loan against the fixed deposit account–which is a costly affair. 

Tax Saving

When it comes to taxation it’s really important to know the right debt funds mutual funds to cut down your taxes. Interest from FD is adds to the total taxable income of the investors. Thus taxable as per the applicable income tax slab rates.

Till March 31st 2023, Capital gains taxation of debt mutual funds depends on the investment holding period. Short term capital gains (investment period is less than 3 years) the gains are added to the investor’s total taxable income and are taxed as per the slab rate. On the other hand, long term capital gains (investment period greater than three years) are taxable at 20% with indexation benefit.

As per the Finance Bill 2023, from April 1st 2023, the capital gains are taxed as per the investor’s income tax slab rate.


An advantage that debt funds have over fixed deposits in the Debt Funds vs FD debate, is that they allow for more flexibility. Instead of placing all the eggs in one basket, the debt funds invest money into diversified portfolios, thus countering the scary prospect of the security defaulting or downgrading by any chance.

In addition, fund managers also have the flexibility to decide asset selection and allocation. They can shift the average ratings and maturity of the diversified portfolios. This is one of the main reasons why debt fund investments accrue higher returns.

Fixed deposits are less flexible, with investors running the risk of losing a large sum of money if things go wrong.


Those investing in debt funds can usually be assured of complete transparency for the whole process. You can retrieve information regarding things like the calculation of net asset value, expense ratio and the portfolio as a whole. 

In contrast, a fixed deposit investor barely receives enough information regarding his or her investment. This is because their money is usually looped together with other deposits and is lent as commercial loans. As a result of this, investors often do not get a chance to predict possible red flags or to opt for premature withdrawal if things go wrong.

You may also like to read about Liquid Funds vs Debt Funds

Read also about Liquid Funds vs Fixed Deposits

Top Performing Debt Mutual Fund 2024

Fund NameCategory
Axis Liquid Fund GrowthLiquid
Kotak Savings Fund GrowthUltra Short
ICICI Prudential Savings Fund GrowthLow Duration

Debt Funds Vs FD: Which is Better?

At the end of the day, there will be many arguments both for and against debt funds and fixed deposits. Hence when it comes to Debt Funds vs FD, the answer lies in the investment goals, financial expectations and understanding of risk.

While these factors are instrumental in helping investors make a decision, the final call completely relies on his or her needs, return expectations, and understanding of risk.

You can also use Scripbox’s Fixed Deposit FD Calculator to calculate the estimated returns and total maturity value on your investment.

Read also about the Arbitrage Fund Vs FD

Check Out Equity Funds vs Debt Funds

Frequently Asked Questions

What is the level of risk associated with debt funds?

The return of debt funds depend on the market as they are exposed to interest rate risk, credit risk, inflation risk and reinvestment risk.

Is debt fund better than FD?

Many investors prefer debt funds over fixed deposits for several reasons like the interest rates of debt mutual funds are better than FD, the liquidity is better than FD and also debt funds have the option to invest through SIP and lumpsum.