Is it a good time to switch money from FD to mutual funds?

Indians are very conservative when it comes to money. The importance of saving money is instilled from childhood and for most the best way to save money is through fixed deposits (FD). 

The reason FDs occupy this sacred space of trust in Indian families is because it is secured, i.e. the banks guarantee your capital invested. So, whenever they got a bonus they invested that money in FDs. The other main reason for them choosing FDs is that the money cannot be removed very easily, thus the money will be away from spending and this way they can stay focused on a goal they set.

But is this the best solution for new earners or the current generation? With the current tax situation where income from FD are taxable. Are you getting good returns from FDs? It is now time to move to other investment instruments such as mutual funds like which give you good returns and also provide you with tax benefits. 

Our elders, especially those who witnessed the share market scandal of Harshad Mehta in 1992 will tell you not to invest in mutual funds as they believe it to be highly risky. Well times have changed now. SEBI now has a strong grip over the stock market and compliance for the stock brokers. They are providing the security for investors.

Now that security from fraud is taken care off, let's see on a return point of view.

FD returns after tax

FDs do have fixed rate of interest, but what is the returns you get after tax.

Fixed deposit rates (%) - 5.25 to 8.10

you can see that you get less returns after tax when it comes to fixed deposit. The higher the tax bracket you fall into the higher the tax you must pay. When this is compared with mutual funds short term investments do come under the tax bracket but long-term investments say like a debt investment for 3 years you will pay 20% returns which after indexation is only a tax of 6%-7%.

More over even if you don't take tax into consideration mutual funds give you a higher return. It is true that mutual funds are subject to market risk but debt funds are relatively less risky. A mutual fund gives a return of a maximum of 7.30%.

Other factors to consider 

Liquidity: Once invested in fixed deposits it is necessary to stay invested for the designated tenure or risk losing the interest already accrued. On the other hand, debt funds can be closed whenever you want along with the interest already earned.

Flexibility: Once invested in one bank the fixed deposit cannot be moved to another bank. This is possible with debt funds where you can move it to another investment group if you believe your current investor is under performing.

Continuous investment: While fixed deposits are a one-time investment, you can add continuously or spread your funds in different portfolio to diversify and continuously invest in small amounts to increase your wealth slowly.


At the end of the day it is you who needs to decide what your investment goals are. Whether you want higher returns or are you more comfortable with fixed deposits where your investment is secured but you will get less returns.