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5 Reasons Why You Should Consider Investing in Debt Mutual Funds over FDs?

Written by - Akshatha Sajumon

March 30, 2022 5 minutes

Bank Fixed Deposits (FDs) have remained the go-to traditional investment alternative for the majority of Indian households. Fixed deposits (FDs) are considered being convenient and risk-free. Until recently, about 50% of the country’s households invested their finances in FDs. As debt mutual funds slowly gained traction in the last few years, retail investors are starting to move towards these investment vehicles, albeit slowly. Debt funds still remain only a small fraction of the assets invested in FDs. 

For investors who have not yet explored debt funds and continue to prefer FD investments, here are the top 5 reasons why they must consider investing in debt funds over FDs.

  1. Better liquidity

A debt mutual fund investment offers better liquidity, as investors can easily withdraw their investments at any time. Fixed deposits generally involve a penalty for early withdrawals, which is not the case with debt funds. Some funds may charge fees in the form of exit load for redemption within 3-6 months. However, most funds don’t involve a charge for redemption after one month. Investors can also make partial withdrawals if needed. The process of redemption in the case of mutual funds is also easier than fixed deposits.

  1. Tax-efficient investments

Debt mutual funds offer better tax efficiency as compared to fixed deposits. Any returns from a debt mutual fund that is retained after 3 years is considered as a long-term capital gain. This is taxable at 20% post indexation. As part of indexation, the investment cost is adjusted for inflation for the investment period. In the case of debt mutual funds, the tax is levied only at the time that the investor redeems his/her units. Also, debt fund gains can be adjusted against short term and long-term capital losses that may have been incurred in other investments.

The longer the debt fund investment, the higher the indexation benefit. In the case of fixed deposits, an annual interest income of more than Rs. 10,000 is subject to 10.3% of TDS. If an investor is not liable to pay tax, he/she can furnish Form 15H or 15G to avoid TDS. FD income is taxed on an annual basis. While the investor can redeem the earnings only after the deposit matures after 5-6 years, the income is taxed annually.

  1. Flexibility to enter or exit

With open-ended debt mutual funds, an investor can enter or exit at any time without losing any opportunity to seize growth. With a fixed deposit investment, an investor gets a lump sum amount only at the end of the investment term. Liquidating and reinvesting in fixed deposits can be time-consuming for many and impact overall returns. In the case of debt funds, an investor can expect his/her investment to continuously grow until redeemed.

  1. Better returns

Investors can easily compare the pre-tax returns from debt mutual funds to fixed deposits. However, with any interest rate changes, debt funds can likely offer higher returns. Especially when it comes to short-term debt funds, rate changes do not impact returns from these. Debt funds that concentrate on long-term bond investments are often sensitive to rate changes. If interest rates fall, the value of the bonds rises, and this leads to capital gains for the investor. Therefore, instead of staying invested in FDs with lower rates, investors can diversify through debt funds and earn better returns depending on their investment horizon. 

  1. SIP, SWP and switching facility

Debt funds offer investors the flexibility of investing in small portions through SIP or systematic investment plans along with lump-sum investment option. FDs, on the other hand, can be opened only through the lump-sum investment route.

There is also an option called SWP or systematic withdrawal plan, which allows investors to withdraw a predetermined amount from the fund investment every month. This can benefit retirees who prefer to have a fixed monthly income for their routine expenses. Investors can also change the SWP amount as needed.

Investors can also seamlessly switch their investments from debt to an equity fund. If needed, they can also switch between schemes offered by the same AMC. 


Debt mutual fund investments have been on a rise in the past few years. This is credited to the fact that debt funds have been offering better returns as compared to FDs and more investors are becoming aware of this fact. Different debt mutual funds come with different risk profiles. Investors can look through the tenure, historical performance, risk level, and personal investment objective before choosing a debt fund. 


1. Are debt funds riskier than FDs?

Debt mutual funds have varying risk levels depending on the instruments that they invest in and their risk rating. FDs, however, carry less risk as there is the assurance of the investor recovering his/her capital investment.

2. How to invest in debt funds?

To invest in debt funds, investors can explore the Fisdom app since it offers the convenience of investing online by exploring a wide range of fund options across risk, return, and timeline options.

3. What are the different types of debt funds?

Some of the commonly available debt funds include liquid funds, overnight funds, ultra-short duration funds, low duration funds, medium duration funds, money market funds, bank and PSU funds, corporate bond funds, etc.

4. How to choose the best debt fund?

To choose the best debt fund, an investor must measure aspects such as risk rating, historical returns, and investment horizon against personal financial goals.

5. Should I include both FD and debt funds in my portfolio?

It is wise to include both FD and debt funds in an investment portfolio to distribute risk and maximise returns.

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