Last Updated on July 21, 2025 at 8:43 am
The mutual fund industry frequently discusses how a specific fund or fund category is an “alternative” to a fixed deposit. Is this true? Which mutual fund is a good alternative to a fixed deposit?
The short and factually correct answer is none! No mutual fund or fund category is a substitute for a bank FD. The reason should be obvious, but we often forget. Mutual funds are subject to market risks, while an FD is not (at least not directly, unless the bank made several operational mistakes).
Comparing the returns (let’s make that average returns or average rolling return to sound fancy) and claiming that X fund/category is a suitable alternative to an FD is completely incorrect.
Take, for example, a debt fund, an equity fund, an AIF, and a gold fund. All of these can offer the same returns at different points in time. That does not make them comparable or alternatives of one another. The risks of each are significantly different, and therefore they are classified as distinct asset classes.
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The same argument applies here. An FD and a mutual fund have different risk profiles, and therefore, you cannot replace one with the other. While a fixed deposit is a fixed return instrument, a debt fund is not. Its returns are entirely market-linked. This means that the returns can be positive (higher or lower than the FD) or negative.
Unfortunately, the IT department fails to recognise this and taxes debt funds according to the slab instead of at a lower rate with indexation, as it did a few years ago.
There is no combination that can lower the risk of a MF. Whether the fund has 100% bonds or money market instruments, or a dash of stocks (conservative hybrid funds) or a big chunk of arbitrage (equity savings or arbitrage fund), the risk is always there and often higher than a simple liquid fund or money market funds (which themselves are riskier than FDs).
So, if you want to pay lower tax than FDs and get similar or higher returns, be prepared for a capital loss. There is nothing wrong with this quest, but beware that the price is significantly higher risk. There is no other way. Mutual funds are subject to market risks and liquidity risks.