Is FD better than Mutual Funds for short-term goals?

Yes. For short durations (1-3 years), capital safety is more important than high returns. FDs or Liquid Funds are safer. Equity Mutual Funds are volatile and risky for short periods.

Do Mutual Funds beat inflation?

Yes, historically. Equity Mutual Funds have delivered 12-14% returns over 10+ year periods. Even after 12.5% LTCG tax and 6% inflation, they offer a positive Real Return of ~4-5%.

What is the tax on FD vs Mutual Funds?

FD interest is taxed at your slab rate (up to 30%). Equity Mutual Fund gains above ₹1.25 Lakh are taxed at 12.5% (LTCG). This huge tax difference makes Mutual Funds far more efficient for long-term wealth.

FD vs Mutual Funds After Inflation: Which Actually Wins?

Who this is for: Indian investors debating between the "Safety" of Fixed Deposits and the "Growth" of Mutual Funds for long-term goals (5+ years).

This comparison uses current 2025 tax rules (New Tax Regime) and assumes a 30% tax slab for FDs vs 12.5% LTCG for Equity Mutual Funds.

Your bank balance is lying to you. If you put ₹1 Lakh in an FD and it grows to ₹1.07 Lakhs, you feel richer. But if the cost of milk, school fees, and fuel rises to ₹1.06 Lakhs, have you actually moved forward?

Most investors focus on the interest rate (7% vs 12%). They forget the two silent killers that eat your money while you sleep: Taxation and Inflation. When you combine them, many "safe" investments like Fixed Deposits turn out to be wealth destroyers. Let's look at the real math.

1. The "Real Return" Formula

To know if you are actually getting richer, you need to ignore the number in your bank account and calculate the Real Rate of Return.

Real Return = [ (1 + Net Return) / (1 + Inflation Rate) ] - 1

Approximation shown for simplicity. Exact calculation uses compounding.

If your Real Return is positive, your purchasing power is growing. If it's negative, you are becoming poorer every year, even if your bank balance shows a profit.

Calculate Your Real Return

Plug in your FD rate, tax slab, and inflation to see your true profit (or loss).

Check Real Return

2. The FD Reality Check (The Leaking Bucket)

Think of an FD like a bucket with a hole in the bottom. You pour water in (interest), but tax and inflation drain it out.

Let's assume you invest in a 7% Fixed Deposit and fall in the 30% Tax Bracket. Inflation is running at 6%.

Step	Calculation	Result
1. Nominal Return	Bank Promise	7.0%
2. Tax Impact (30%)	7% - (30% of 7%)	4.9%
3. Inflation Impact	4.9% - 6.0%	-1.1%

Verdict: You are losing 1.1% of your wealth every single year. You are essentially running on a treadmill—working hard to save, but staying in the same place (or falling backward).

We break this down in more detail, including common misconceptions, in our dedicated article on why fixed deposits fail to beat inflation .

3. The Mutual Fund Advantage

Now let's look at a diversified Equity Mutual Fund portfolio. The stock market is volatile in the short term, but it acts as a growth engine over the long term.

Historically, Indian equities have delivered ~12% CAGR. The tax rule is remarkably better: just 12.5% on Long Term Capital Gains (LTCG), and that too only on profits above ₹1.25 Lakhs.

If you are new to this concept, we strongly recommend first understanding how inflation silently destroys purchasing power , because every comparison on this page builds on that foundation.

Step	Calculation	Result
1. Nominal Return	Market Average	12.0%
2. Tax Impact (~12.5%)	12% - (12.5% of 12%)	~10.5%
3. Inflation Impact	10.5% - 6.0%	+4.5%

Illustrative example assuming long-term holding and gains above the LTCG exemption limit.

Verdict: Even after paying tax and accounting for inflation, you are growing your purchasing power by 4.5% annually. This is the difference between just saving money and actually building wealth.

Most online calculators ignore tax impact. We explain this in detail, along with a working calculator, in our guide on SIP returns after LTCG tax .

Visualize 12% Growth

See how a small monthly SIP grows exponentially over 10 years compared to an FD.

Open SIP Calculator

Choosing Mutual Funds also involves deciding how to invest. We compare both approaches in detail in SIP vs Lumpsum: Which Works Better in Real Markets .

4. The Hidden Enemy: Lifestyle Inflation

The government might say inflation is 6%, but does your grocery bill agree?

Think about the cost of a movie ticket, a semester of college tuition, or even a liter of milk compared to 10 years ago. This is called Lifestyle Inflation, and for middle-class Indians, it is often closer to 10-12%.

FD Investors: Cannot keep up. To maintain their lifestyle, they are often forced to dip into their principal amount, which depletes their savings even faster.
Mutual Fund Investors: Have a fighting chance. Their post-tax return (approx 10.5%) closely matches this lifestyle inflation, allowing them to maintain their standard of living without eating into their capital.

5. Side-by-Side Comparison

Feature	Fixed Deposit (FD)	Equity Mutual Fund
Safety	High (Capital Protected)	Moderate (Market Linked)
Taxation	High (Slab Rate 30%)	Low (12.5% LTCG)
Inflation Beating?	No (Negative Real Return)	Yes (Positive Real Return)
Best Horizon	0-3 Years (Short Term)	5+ Years (Long Term)

Conclusion

FDs are not "bad"—they serve an essential role for your emergency fund and short-term goals where safety is priority #1.

However, for long-term goals like retirement or children's education, relying solely on FDs is a guaranteed way to lose value. To beat the double whammy of tax and inflation, you need the growth engine of equity.