Why Mutual fund make more sense then FD in India

In today’s era, people are looking for high returns than the traditional way that is being carried from so many years. Many of you must be familiar with these traditional values of the bank. As it is the only financial instrument being provided by the RBI, many people think that there is no other way of investment other that the Fixed Deposit options. So, in a simple manner people generally think that the highest return that they are going to gain is not more than 6% or maximum 7% of a year.

To meet the needs of the growing standard and the rising inflation, these interest rates are actually peanuts. Investing in Mutual Funds yield better than returns as compared to the traditional Fixed Deposit method. It is a misnomer that mutual fund investment has a very high risk.

Mutual funds are generally considered inflation beating instruments. Mutual funds help you get better inflation adjusted returns as compared to fixed deposits in the long run. It can be said that mutual fund offers a wide variety of schemes that you can choose as per your needs and convenience. Moreover, it has the potential to deliver returns over the medium to long term. Some mutual funds provide you with the option of liquidity. That is you can withdraw the money whenever you want with a small deduction fee. In a fixed deposit, you hardly get these options.

As mentioned before, many investors find mutual funds as a high-risk investment, so let us give a glance on the safety of your funds

Safety of your money in FD / Mutual Fund (Dept Fund):

Rating Type Of Issuers How Safe ?
Sovereign Government Of India Safest in India
AAA PUC Bank, Public Sector, Large financially stable company Very High Degree
AA Private Companies High Degree of safety
BBB Private Companies Below Average
BB and lower Private Companies Poor and very poor

Read more about ratings at:

Most Fix Deposits in India is AAA rated which basically means that your money is safe with them and most of the investors believe that FD is guaranteed by the government of India and it’s true but only for Rs.1 lakh and bellow.

The debut fund that is the mutual fund safety can be understood by the kind of investments they do with your money which is typically sovereign to AA. Here, it can be proved that the people who perceive that mutual fund investment is of high risk are actually incorrect. The equity shares popularly called as share market has a higher risk than mutual fund investments.

Understanding Returns and Taxes for FD and Mutual Fund:

Tax Status is an important aspect which should be considered while choosing between mutual funds and fixed deposits. For mutual funds, the tax status depends on the category of mutual fund – equity or debt. Your gains from long-term investment in debt mutual funds (i.e. over a period of 1 year) are taxable @ 20% with indexation and 10% without indexation (whichever is lower); while your short-term capital gain from debt and liquid mutual funds is taxable as per your tax slab.

In the case of bank FDs, the interest is taxable as per your tax slab (i.e. as per the marginal rate of taxation) irrespective of the tenure of the bank FD. Thus comparatively, investing in mutual funds is more tax efficient than bank FDs. The interest earned under an FD is taxable under “Income from other sources”. The amount invested under 80C of the Income Tax Act is exempt but interest earned on such investments is taxable.

Tax Benefit under Mutual Fund

  1. TDS(Tax Deducted at Source)

There is no TDS deduction in mutual fund investment.

  1. Capital Gain Tax

The profit that you earn when you sell mutual fund units is called as the Capital Gains and the tax applied on this is called as Capital Gain Tax.

  1. Dividends Tax

For the investors, the dividends received from a debt mutual fund are completely tax-free but for the mutual fund company, dividends declared are taxed and is known as “Dividend Distribution Tax”. This has to be paid by the company.

  1. Tax benefits under various section
  2. ELSS and RGESS provides tax benefits to the investor
  3. Dividends received under ELSS and RGESS are completely tax-free

With an example of Mr. A and Mr.B it will be easy to understand the tax returns of mutual funds and fixed deposit.

Duration investment Return Tax Liability Maturity Amount Tax on Maturity Amount After tax rate
Mr. A in FD 5 Years Rs.10,000,00 9% 30% Rs.15,38,623 30% on Rs. 5,38,623/- which is Rs. 1,61,568 6.60 %
Mr. B in Debut Funds 5 Years Rs.10,000,00 9% 30% Rs.15,38,623 Rs 19,679 8.70 %

Mr A has invested in Fixed deposit and Mr.B has invested in mutual funds with same amount of Rs 10,00,00. Both of them come under the tax slab of 30%.

Soon after the maturity period that was 1ST March 2015, Mr. A will get Rs.15,38,623/- and Mr. B would also get the same amount. Now, comes the time to pay the tax. On the interest amount of Rs. 5,38,623/- Mr. A will have to pay 30% tax which will be Rs. 1,61,568. On the other side, Mr. B would be only paying Rs 19,679 tax.

How did this happen? Here is the answer, on long Term Capital Gain, an investor has to pay 20.6% tax after indexation. The calculated indexed cost of Rs. 10 lakh comes to  Rs. 14,40,225 which is subtracted from Rs. 15,38,623/- so capital gain will be Rs 98398 & tax will be approximately Rs 19,679.

This simple example smoothly conveys about the tax benefit of mutual funds over fixed deposit. So if you are looking for high returns with tax benefits, it is better to opt for debt fund investment.

As people are getting aware of mutual fund there are companies like Reliance mutual fund in India which are taking initiative like Mutual Fund Day (MFD) and Fund For A Friend (FFAF) to spread more awareness for a mutual fund.



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