Which is better – debt fund or fixed deposit?

Debt fund or fixed deposit - Safe money investment

Until a few years ago, most people did not understand various investment instruments apart from government saving certificates and national pension schemes.

Today, the Indian market has come a long way with the introduction, understanding, and popularity of debt funds, provident funds, debt mutual funds, and fixed deposits. But to an amateur, there is still some confusion between fixed deposits and debt funds, as both of these are considered low-risk investments and safer options.

The main aim of these two options is to protect the investors’ corpus from any unexpected market fluctuations. While the final choice depends on individual preference, it is important to understand both options based on various parameters: liquidity, taxation, ease of investment, tenure, etc.


In the case of debt mutual funds and fixed deposits, it is easy to liquidate both. In the case of debt funds, all you need to do is submit a withdrawal application with your financial institution, and the money gets credited to your account in one business day.

On the other hand, you will need to pay a penalty if you wish to break your fixed deposit before maturity. However, if you have a tax saver fixed deposit, you cannot liquidate it before its maturity, i.e., 5 years.

Ease of Investment

It’s easy to invest in FD and debt funds both. You can go with systematic or lump sum investment in debt funds, and there are various categories within debt funds to choose from to align with your financial goals.

On the other hand, you can open a fixed deposit account easily online, verify your KYC details and deposit a lump sum amount for a fixed tenure. Ensure to go with the bank, which provides high-interest rates. For instance, IndusInd Bank provides the highest interest rates for fixed deposits in India.


There is no tax deduction if your interest income from your fixed deposit is less than INR 40,000 in a year. Additionally, if you open a tax-saving fixed deposit–with a lock-in feature of 5 years–you can claim a tax deduction up to INR 1.5 lakh in a financial year, under Section 80C of the Income Tax Act.

On the other hand, tax on debt funds depends on the holding period. For instance, debt funds, if held for more than 3 years, are known as capital gains and are taxed at 20%, and if you sell them before 3 years, they are considered short-term capital gains.


With fixed deposits, you know what your return will be at maturity. This is one of the biggest reasons why people consider it the best investment choice, especially for those who are risk averse. Even if the rates get revised, you will still get your final maturity amount at the rate fixed at the time of investment.

On the other hand, debt funds do not guarantee fixed returns. They are subject to market risks but offer high returns.

To Sum Up

As you can see, FD and debt funds make for an ideal investment option for those looking to grow their wealth. Although choosing between the two depends upon your risk appetite, financial goal, and investment horizon. Consult with an expert at IndusInd Bank if you are in a dilemma.

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