Equity Mutual Funds or FDs: Where Should You Keep Your Long-Term Savings?
Summar
Fixed Deposits and equity mutual funds serve different roles in long-term savings. Fixed Deposits offer certainty and capital protection, while equity mutual funds provide market participation, diversification, and the potential for higher long-term growth. For investors planning over extended periods, equity mutual funds often form the core of long-term wealth building, while Fixed Deposits support stability and liquidity within the overall savings structure.
Saving money is easy. Deciding where to keep it is not.
Most people begin their financial journey with Fixed Deposits. They are familiar, predictable, and widely trusted. For decades, FDs have been the default choice for Indian savers. They promise certainty, and certainty feels safe.
However, long-term savings are usually meant to support needs that lie many years away—education, retirement, or long-term financial independence. When the time horizon is long, the choice of investment becomes as important as the habit of saving itself.
This is where the real question begins: EquityMutual Funds vs Fixed Deposits for long-term savings—and why does it matter?
Who Typically Invests in Fixed Deposits?
FD investors generally prefer stability over growth. They value fixed returns, predictable outcomes, and defined maturity periods. For many, the assurance of a guaranteed rate feels more comforting than market-linked outcomes.
Fixed Deposits are commonly used to park surplus funds, manage liquidity, or meet known short-term or medium-term expenses. Their simplicity makes them useful for these purposes.
There is nothing wrong with this approach. But when savings are meant for long-term wealth building, the limitations of fixed returns begin to show.
Fixed Deposits vs Equity Mutual Funds: A Long-Term Savings Perspective
| Aspect | Fixed Deposits (FDs) | Equity Mutual Funds |
| Core Purpose | Capital preservation | Long-term wealth building |
| Return Structure | Fixed and pre-defined | Market-linked and variable |
| Tax Treatment | Interest taxed annually | Tax-efficient for long-term holdings |
| Liquidity | Penalties may apply | Generally liquid |
| Risk Nature | Lower | Higher |
| Inflation Risk | High | Low |
This comparison is not about choosing one and rejecting the other. It highlights where each option fits. Fixed Deposits are designed for certainty. Equity mutual funds are designed for growth over time. When the objective is long-term savings, this distinction becomes critical.
Understanding the Return Landscape: Bank FDs vs Equity Mutual Funds
Bank FD Returns (Govt / PSU Benchmark)
Most public sector banks in India currently offer around ~7% p.a. on 3–5 year Fixed Deposits (as reported by The Economic Times). These returns are stable and predictable but fully taxable every year. FDs primarily protect capital rather than expand it significantly over long periods.
Equity Mutual Fund Returns (Long Term – Indian Markets)
Indian equity mutual funds have historically delivered around ~12.62% annualised returns ( over long periods. While short-term performance can fluctuate, long-term equity investing benefits from compounding and participation in economic growth.
(Assuming Investment in Equity Funds and an average return of 12.62% p.a as per AMFI Best Practice Guidelines Circular No. 135/BP/109-A /2024-25, dated September 10, 2024. "Past performance may or may not be sustained in future and is not a guarantee of any future returns".Figures are for Illustrative Purposes only.")
Wealth Build-Up Comparison (Post-Tax Reality)
Investment Amount: ₹5,00,000 (lump sum)
Returns Used: FD – 7% | Equity MF – 12.62%
Returns matter, but what truly counts is what remains after tax.
Tax Assumptions: Bank FD interest is taxed every year as per the investor’s slab. At a 30% tax rate, a 7% FD effectively delivers about 4.9% post tax, which limits compounding. Equity mutual funds are taxed more efficiently—long-term capital gains are taxed at 12.5%, the first ₹1.25 lakh of gains is tax-free, and tax is paid only at redemption.
Post-Tax Wealth Comparison
| FD | Equity MF | |
| Returns | 7% | 12.62% |
| Tax Rate | 30% | 12.50% |
| Post Tax Return | 4.90% | 11.04% |
Moreover, FD taxation interrupts compounding every year. Equity mutual funds allow compounding to work uninterrupted over long periods.
Assuming Investment in Equity Funds and an average return of 12.62% p.a as per AMFI Best Practice Guidelines Circular No. 135/BP/109-A /2024-25, dated September 10, 2024. "Past performance may or may not be sustained in future and is not a guarantee of any future returns". Figures are for Illustrative Purposes only."
Inflation and the Real Return Impact
Inflation quietly reduces purchasing power year after year. Historically, India’s inflation has averaged around 5–6% (Source:Trading Economics).
- FD @ 4.9% – 5% inflation ≈ ~-0.10 % real return
Low real returns invite the Risk of Wealth Erosion - Equity @ 11.04 % – 5% inflation ≈ ~6.4% real return
Purchasing power increases meaningfully, supporting long-term objectives.
Long-term savings must not just grow—they must grow faster than inflation.
How Equity Mutual Funds Support Long-Term Savings
Equity mutual funds invest in businesses across sectors and market sizes, allowing investors to participate in economic expansion. Over long periods, this growth potential becomes essential for meeting rising costs related to education, healthcare, and retirement.
Different equity-oriented strategies allow investors to align risk with their time horizon. As financial priorities evolve, MF portfolios can be rebalanced while remaining within the mutual fund framework—something fixed instruments cannot easily offer.
Why Professional Management Matters
Equity mutual funds are managed by experienced professionals who monitor markets, adjust MF portfolios, and respond to changing economic conditions. This helps investors stay disciplined and avoid emotional decisions, which is critical for long-term compounding.
Using Fixed Deposits and Equity Mutual Funds Together
Choosing between FDs and equity mutual funds does not have to be an all-or-nothing decision. Many investors use Fixed Deposits for short-term needs, while equity mutual funds form the growth engine of their long-term savings. The balance depends on time horizon, financial needs, and comfort with market movement.
Are You Really Building Wealth?
- Fixed Deposits help protect money
- Equity mutual funds help build wealth
- After tax and inflation, the difference becomes significant
Long-term wealth building is not about avoiding risk entirely.
It is about beating inflation and taxes over time—and that is where equity mutual funds stand out as a stronger long-term wealth-building tool.
FAQs
Q) What is the main difference between Fixed Deposits and equity mutual funds?
Fixed Deposits offer fixed and predictable returns, while equity mutual funds provide market-linked returns that aim to build wealth over the long term.
Q) Are Fixed Deposits suitable for long-term savings?
Fixed Deposits are useful for capital protection and known, short-term needs, but their fixed returns can limit wealth building over long investment horizons.
Q) How do equity mutual funds support long-term wealth building better than FDs?
Equity mutual funds invest in growing businesses and sectors, allowing savings to participate in economic expansion, whereas FDs remain locked at pre-defined rates.
Q) Can Fixed Deposits and equity mutual funds be used together?
Yes. Many investors use Fixed Deposits for stability and liquidity, while equity mutual funds act as the primary growth engine for long-term savings.