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The Dilemma between a Fixed Deposit and a Mutual Funds: Which Fund to invest in as a beginner?

Submitted by admin on December 25th, 2025

The dilemma of whether to take fixed deposits (FDs) or mutual funds is perplexing to first time investors in India. These two options cater to the various financial objectives and risk-taking. The beginners can make the appropriate investment choice by knowing their characteristics.

What Is a Fixed Deposit?

One of the conventional types of investments is a fixed deposit provided by the banks and NBFCs. Investors would deposit a lump sum over a known period which can be a few months or a number of years and receive a certain rate of interest. The FDs are regarded as being low-risk and offer predictable returns, which makes them appropriate to the conservative investor.

What Are Mutual Funds?

Mutual funds combine the funds of various investors and invest in equities, debts or both. The returns are market-related with the performance of the market thus making mutual funds a market-linked and relatively riskier investment compared with FDs. Nevertheless, they have greater returns potential particularly in the long term.

Risk and Return Comparison

Fixed deposits are safe and predictable in terms of returns but not always likely to outrun inflation. Equity and hybrid funds (or even mutual funds) can potentially produce returns that are able to beat inflation in the long run (with market risk). Some investors have more tax efficiency with moderate risk in debt mutual funds.

Liquidity and Flexibility

FDs tend to possess a lock-in period and an untimely withdrawal can draw some penalties. Mutual funds have more liquidity as most open-ended funds may be redeemed in a few working days. The mutual funds are also accessible to beginners by way of Systematic Investment Plans (SIPs).

Taxation

Interest charged on FDs is subject to 100 percent taxation based on the income tax bracket of the investor. Depending on the type of fund and duration of holding the fund, mutual fund taxation is often more tax-proof to long-term investors.

Which one is more suitable to first time investors?

Short term risk averse investors could be drawn to fixed deposits. Mutual funds can be more beneficial to long-term investors who have an average level of risk tolerance.

Conclusion

The reason fixed deposits and mutual funds all belong in a balanced portfolio is explained. A decision that is wise must be synchronized to financial purpose, time duration and risk level of individuals making first investment decisions.