What is the Current Debate of Mutual Funds vs FD Looks Like?

Introduction

It's a question many investors are asking right now, and for good reason. Specifically, the debate around Mutual funds vs FD has gained new intensity.

The Reserve Bank of India (RBI) has made some significant moves recently. Since February 2025, the RBI has cut the repo rate by a substantial 100 basis points, including a notable 50 basis points cut in June 2025, according to the Economic Times. 

This has, as expected, led to banks slashing their Fixed Deposit (FD) rates. What were once attractive returns from FDs are now looking quite different, with top FD rates generally ranging from 8% to 9%, primarily from small finance banks. 

This shift has reignited the discussion: are Mutual funds vs FD still a clear-cut choice, or is it time to reconsider? 

This blog aims to explore both sides of this evolving debate, offering updated data and analysis to help you navigate your investment decisions. Also if you’re an NRI, check out how Indus NZ works.

Tracking FD Rate Trends

To truly understand the current Mutual funds vs FD discussion, it's important to look at how FD rates have moved. Just a few months ago, before the recent series of repo rate cuts, a one-year bank FD typically offered interest in the range of 7% to 7.5%. 

These were considered decent, safe returns for many conservative investors among Mutual funds vs FD.

However, after the cumulative 100 basis points repo rate cut by the RBI since February 2025, the landscape has changed noticeably. 

FD rates across many banks have dropped by 30 to 70 basis points. For instance, The Economic Times states that State Bank of India's (SBI) highest FD rate has fallen to around 6.7%. 

While some small finance banks are still offering rates in the 8%–9% range, this trend is likely to be short-lived as the broader economic environment adapts to the lower interest rate regime.

Trend Chart: Average FD Rates in India (Illustrative)

This chart clearly illustrates the downward pressure on FD returns, making the Mutual funds vs FD comparison even more relevant.

Exploring Mutual Funds in the Current Scenario

While FDs have seen their returns dwindle, mutual funds, in the comparison of Mutual funds vs FD, particularly debt-oriented ones, have a different story to tell. 

Debt mutual funds generally offer returns that vary depending on their duration and the type of underlying bonds they hold, often ranging from 6% to 9%. This variability is a key distinction in the Mutual funds vs FD debate.

What’s particularly interesting, especially in the wake of the repo rate cuts, is how many debt funds have performed. 

It's also worth noting the direct impact of repo rate cuts on bond markets. When the RBI cuts the repo rate, it generally leads to an increase in bond prices. 

This is because existing bonds, which offer a higher fixed interest payment, become more attractive in a lower interest rate environment. This scenario typically benefits certain types of debt mutual funds, specifically:

• Long-duration funds: These funds hold bonds with longer maturities, which are more sensitive to interest rate changes. As rates fall, their NAVs tend to rise.

• Dynamic bond funds: These funds have the flexibility to actively manage their portfolio duration based on the fund manager's interest rate outlook. In a falling rate environment, they can increase their exposure to longer-duration bonds to capture gains.

• Gilt funds: These funds primarily invest in government securities. Like other long-duration bonds, gilts also see their prices rise when interest rates fall, benefiting investors.

Therefore, for investors contemplating Mutual funds vs FD, the current interest rate trajectory might make certain debt mutual fund categories an appealing consideration for potentially higher, though not guaranteed, mutual fund returns.

Key Comparison Table for Mutual Funds vs FD

When deciding between Mutual funds vs FD, it's helpful to break down their core characteristics. Here’s a comparative look:

This table clearly highlights the fundamental differences in risk, return, and other aspects, which are crucial in the Mutual funds vs FD discussion.

Taxation Differences: What NRIs Should Know

For Non-Resident Indians (NRIs), understanding the tax implications is perhaps one of the most critical aspects of the Mutual funds vs FD debate. The taxation rules can significantly impact your net returns.

Fixed Deposit (FD) Interest for NRIs: 

• Interest earned on FDs is fully taxable at the NRI's applicable income slab rate in India. 

• Furthermore, banks are typically required to deduct Tax Deducted at Source (TDS) on FD interest above certain thresholds. 

• While you can claim this TDS against your tax liability, it's a direct deduction at source.

Equity Mutual Funds for NRIs:

Short-Term Capital Gains (STCG) 

• If you sell your equity mutual fund units within one year of purchase, the gains are considered STCG and are taxed at a flat rate of 20%.

Long-Term Capital Gains (LTCG) 

• If you sell your equity mutual fund units after holding them for more than one year, the gains are considered LTCG. These gains are taxed at 12.5% on gains exceeding ₹1 lakh in a financial year. 

• Gains up to ₹1 lakh are exempt from tax. This favorable tax treatment for long-term equity investments is a significant advantage in the Mutual funds vs FD comparison.

These tax distinctions, particularly the indexation benefit for long-term debt funds and the preferential treatment for equity LTCG, can tilt the post-tax return comparison in favor of mutual funds for many investors, especially NRIs.

Strategies Investors Consider in Mutual Funds vs FD Balance

Given the current economic climate and the changing interest rate scenario, many investors are adopting more nuanced strategies rather than sticking to an "either/or" approach in the Mutual funds vs FD debate.

1) Blended Approach

• This is a popular strategy for Mutual funds vs FD. 

• Instead of putting all their eggs in one basket, investors combine the guaranteed safety and predictable income of FDs with the higher yield potential and inflation protection offered by mutual funds (both debt and equity). 

• This allows them to meet different financial goals with appropriate risk levels. 

• For instance, short-term emergency funds might go into FDs, while long-term wealth creation goals are addressed by mutual funds.

2) Laddering FDs to Mitigate Rate-Reduction Risk 

• With falling FD rates, simply locking in money for a long tenure might not be the best approach. 

• A fixed deposit laddering strategy involves breaking a larger investment into several smaller FDs with staggered maturity dates (e.g., 1-year, 2-year, 3-year, and 5-year FDs). 

• As each shorter-term FD matures, the investor can reinvest the proceeds into a new longer-term FD at the prevailing interest rates. 

• This strategy for mutual funds vs FD helps mitigate the risk of reinvesting the entire corpus at potentially lower rates in the future, providing a smoother average return over time. It also offers periodic liquidity.

Debt Fund SIPs: 

• Instead of a lump sum, investors consider Systematic Investment Plans (SIPs) in debt funds, for SIP vs Lumpsum

• This approach for mutual funds vs FD allows investors to average their investment over time. 

• When yields are high, they accumulate more units; when yields stabilize or fall, the earlier investments benefit from price appreciation. 

• This strategy can be particularly effective in a declining interest rate environment. Know how SIP works to have a clear picture. 

Ultimately, the choice in the Mutual funds vs FD comparison often boils down to individual financial goals, risk appetite, and investment horizon. Diversification and a well-thought-out strategy are key.

Indus NZ's Role

To make the investment needs of NRIs easier, Indus NZ stepped in, offering a streamlined and transparent way to invest, particularly relevant in the Mutual funds vs FD discussion.

Indus NZ provides easy access to a vast universe of over 500 mutual funds across various categories, including debt, hybrid, and equity options. 

One of the standout features of Indus NZ is its commitment to maximizing your investment power. We offer 1% lowest FX rate. This cost efficiency can make a significant difference to your overall returns.

Furthermore, Indus NZ has simplified the onboarding process for NRIs. KYC (Know Your Customer) approval can be completed swiftly, often within 3 minutes. We work through the DTAA for NRIs from NZ.

It's also important to note that with Indus NZ, you do not need an NRE account to invest, which simplifies the process considerably for many NRIs.

While Indus NZ currently supports only mutual fund investments, it's worth knowing that we have plans to expand their offerings to include direct investment opportunities in India in the near future. 

Conclusion

The current financial climate, marked by the Reserve Bank of India's repo rate cuts, has undeniably reshaped the landscape for traditional savings instruments. 

Fixed Deposit (FD) interest rates are experiencing a downward trend, now often settling at or even below 7% for many major banks. This naturally brings the long-standing Mutual funds vs FD debate into sharper focus for investors seeking optimal returns.

Ultimately, the choice between Mutual funds vs FD isn't about one being inherently "better" than the other in all scenarios. 

Instead, investors focus on a balanced allocation strategy, carefully considering your individual financial goals, your comfort level with market risk, and your applicable tax bracket, may prove to be the most prudent approach. 

For NRIs in New Zealand looking to invest in India, platforms like Indus NZ offer a seamless way to explore and access a diverse range of debt and hybrid mutual funds. 

FAQs on Mutual funds vs FD

1) Why have FD rates in India fallen recently? 

FD rates have fallen because the Reserve Bank of India (RBI) has cut the repo rate, reducing the cost of borrowing for banks, which in turn leads banks to lower their deposit rates.

2) Are mutual funds riskier than FDs? 

Yes, mutual funds carry market risk as their returns fluctuate with market conditions, unlike FDs which offer guaranteed returns and are generally considered very low-risk investments.

3) Do debt mutual funds always outperform FDs? 

Not always. While many debt funds have outperformed FDs recently, their returns are not guaranteed and depend on interest rate movements and the performance of underlying bonds.

4) What is the tax benefit for NRIs investing in debt mutual funds? 

NRIs can benefit from long-term capital gains (LTCG) tax of 20% with indexation on debt mutual funds held for over three years, which can be more tax-efficient than FD interest.

5) What is "FD laddering"? 

FD laddering is a strategy where you spread your investment across multiple FDs with staggered maturity dates to manage interest rate risk and maintain liquidity.

Standard Disclaimer

Investing involves risk, and returns are not guaranteed. Please conduct your own research before making any investment decisions. This information is provided for general purposes only and does not constitute financial advice.

Indus does not provide investment, financial, legal, or tax advice. While we facilitate access to Indian mutual funds, any decision to invest is solely your responsibility. You should consult a qualified financial adviser or tax specialist before making any investment or tax-related decisions, especially if you are uncertain about how these investments apply.