Mutual Funds That Help You Beat FD Interest Rates

Mutual Funds That Help You Beat FD Interest Rates

Explore smart debt and hybrid alternatives that typically offer higher post-tax returns than traditional fixed deposits in India.

Why Mutual Funds Can Outperform FDs

India’s fixed deposits (FDs) currently offer interest rates around 7–8%, with some small finance banks reaching ~9% for senior citizens. But public and private banks have recently reduced these rates by 20–50 basis points .

Meanwhile, over the past two years, more than 260 debt mutual funds have delivered returns that exceed typical FD rates—making them a compelling alternative for low‑risk investors.

Mutual Fund Categories That Often Beat FDs

  1. Liquid & Ultra‑Short Duration Funds

    • Invest in high-quality money-market instruments.

    • Yields of ~6.5–7.5%, offering similar liquidity to FDs 

  2. Short‑Term Debt & Corporate Bond Funds

    • Invest in corporate/government securities over 1–3 years.

    • Can outpace FDs—especially with indexation benefits 

  3. Floater (Floating‑Rate) Funds

    • Bonds with variable rates linked to benchmarks.

    • Earn ~7–8% returns in current rising‑rate environment 

  4. Arbitrage & Income‑Plus Arbitrage FoFs

    • Exploit the gap between cash and futures markets, with surplus parked in debt.

    • Delivered 7–8% in the past year—beating many public-bank FDs 

    • Benefit from equity-style tax treatment: LTCG at 12.5% (after 1 year), with gains up to ₹1.25 lakh per annum being tax-free

Recommended Funds That Outperform FDs

  • BHARAT Bond ETF FOF (Apr 2032)
    — ~8.6% 1‑yr returns; ultra-low expense ratio 

  • HDFC Floating Rate Debt Fund
    — ~8.3% 1‑yr returns, rating V. strong quality assets 

  • Nippon India Arbitrage Fund
    — ~7.9% 1‑yr returns; equity tax treatment 

  • ICICI Prudential Banking & PSU Debt Fund
    — ~7.8% 1‑yr returns, reliable for 5 years 

  • Kotak Dynamic Bond Fund
    — ~11.4% 1‑yr, ~9.7% 5‑yr returns—shown superior performance in last 5 years

  • IDFC Dynamic Bond Fund
    — ~8.6% 5‑yr returns, flexible maturity allocation 

Key Advantages Over FDs

  • Higher Returns + Tax Benefits:
    Many of these funds deliver 7–9% returns, outpacing FDs—especially with indexation and equity-taxed arbitrage

  • Better Liquidity & Flexibility:
    No lock-ins, quicker access, and no penalty for early withdrawal (unlike FDs).

  • Portfolio Diversification:
    Debt mutual funds spread investments across multiple issuers and instruments, reducing single-bank default risk.

Watch-Outs & Risks to Consider

  • No Guaranteed Returns: Fund NAVs may fluctuate with interest rate and credit risks.

  • Tax Parity Post-2023: Debt fund income is now taxed similarly to FD interest 

  • Lack of Deposit Insurance: FD insurance up to ₹5 lakh; unsubsidized mutual fund investments carry the market risk.

When to Choose Which Fund?

SituationRecommended Fund Type
Need instant liquidity + stabilityLiquid/Ultra‑short funds
Fixed horizon 1–3 yearsShort‑term debt / Floater funds
Comfortable with small volatility, better tax treatmentArbitrage / Income‑Plus FoFs
Expecting rate cuts, can tolerate interest-rate volatilityGilt or dynamic bond funds

Final Takeaway

If you’re looking to earn better post‑tax returns than FDs without diving into equity risk, then categories like liquid, short‑term, floater, arbitrage, and dynamic bond funds are well worth considering. Choose based on your investment horizon, risk tolerance, tax bracket, and liquidity needs. And, of course, periodic review is essential to stay aligned with your goals.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.