Why are Millennials & Gen Z Ditching FDs for Mutual Funds?

Fixed deposits (FDs) are term-based investment instruments banks offer, where money is locked in for a fixed period at a predetermined interest rate. On the other hand, mutual funds pool money from multiple investors to invest in a diversified portfolio of assets, such as equities, bonds, or money market instruments, and are managed by professional fund managers.

For long, FDs have been the go-to investment choice of many Indians. Salaried individuals, small business owners, and rural investors have widely used mutual funds as a dependable way to save money. However, a noticeable shift is underway among younger investors. Millennials and Gen Z are gradually moving away from traditional FDs in favour of mutual funds, which offer market-linked returns and greater flexibility. The trend reflects a growing risk appetite, increased financial awareness, and a shift in long-term financial goals.

The blog explores the reasons behind the shift, highlights the key differences in the mutual funds vs FD debate, and examines the implications for India’s broader savings and investment landscape.

The traditional appeal of fixed deposits

For decades, fixed deposits remained a trusted investment choice for investors. Both salaried individuals and small business owners parked their hard-earned money in bank deposits and post office small saving schemes. Many also preferred maintaining recurring deposits (RDs) as a tool for disciplined savings. Once RDs accumulated a sizable sum, they were often converted into long-term FDs that offered higher interest rates.

FDs gained popularity for several reasons:

The popularity of FDs stemmed from the unique characteristics of this asset class.

• Safety and security: FDs guarantee the return of the principal along with interest.

• Predictable Outcomes: This helped people plan for retirement and other major financial goals.

• Ease of use: FDs were simple to open and manage, requiring no specialised skills.

• Flexibility: Available in various tenures to suit short- medium- and long-term goals.

• Tax benefits: 80C tax-saving FDs helped reduce taxable income.

However, younger investors are no longer attracted to FDs despite these benefits.

Changing priorities: Why FDs no longer appeal to the young

In the mutual fund vs fixed deposit debate, millennials and Gen Zs increasingly favour market-linked mutual funds. Here’s why:

• Real vs nominal returns: FDs offer returns at fixed nominal interest rates. The real rate of return (the difference between the nominal rate and the rate of inflation) is often low. For example, if an FD offers 7% interest and the prevailing inflation or the consumer price index (CPI) is 6%, the real rate of return will be just 1%.

• Rising inflation: Inflation is a constant reality in any growing economy like India. From 2015 to 2025, the average CPI remained at 5.88%. Average rates of interest on fixed deposits during the same period declined from 8-9% to 5-7%. Reducing interest rates on FDs with high CPI makes fixed-income assets less attractive.

• Loss of purchasing power: The increasing trend in the inflation rate reduces the purchasing power of the future income stream from fixed deposits. So, it makes FDs less attractive for financial planning.

• Tax implications: Interest earnings from FDs are taxable as per an individual’s income slab. As younger investors expect higher future earnings, the post-tax returns on FDs seem unattractive.

As the young investors’ interest in FDs is waning, mutual funds (MFs) are winning the mutual funds vs FD debate. Along with lump sum investments, many are choosing Systematic Investment Plans (SIP) to park their regular savings in mutual funds.

What makes mutual funds appealing

Mutual funds pool money from thousands of investors and invest in various asset classes such as equities, government bonds, corporate debt, commodities, gold and real estate. Here are the reasons why MFs shine among millennials and Gen Zs:

• Diverse options: Unlike FDs, mutual funds come in a wider variety, including large cap, small cap, diversified, index, balanced, sector-specific funds, debt funds, liquid funds and many more. MFs offer flexibility to match different risk profiles and goals.

• Higher returns: The Indian stock market has shown long-term growth. For example, the BSE Sensex rose from 4,000 in 1998 to 78,000 in early 2025. The growth prospect is equally strong as per several official and unofficial estimates in the near long term.

• Affordability and accessibility: Mutual fund plans allow investing as little as ₹100 in SIPs, making it highly affordable.

• Transparency: Regulated by the Securities and Exchange Board of India (SEBI), mutual funds provide clear disclosures about holdings and performances.

• Tax efficiency: Income tax authority considers profits from selling equity MFs as capital gains. Any capital gain after holding a fund for 365 days attracts long-term capital gain tax (LTCG) at a fixed rate of 10%. It makes mutual fund investments tax-efficient compared to FDs.

Along with these benefits, the higher risk appetite of younger investors also makes equity-based mutual funds more attractive.

Risks associated with mutual funds

While mutual funds offer many benefits, over-reliance on them may expose investors to risks.

• Market volatility: Mutual fund returns fluctuate with market conditions. A sudden downturn can significantly reduce portfolio value.

• Liquidity risks: Any unforeseeable economic disruption may wipe out a significant portion of the money invested in equity-only mutual fund plans. Besides, in emergencies, investors may need to sell their mutual funds during unfavourable market conditions, potentially locking in losses. Therefore, financial planning should include diversification and an emergency fund to ensure stability.

Final takeaway

Mutual funds are evolving as the first choice for parking hard-earned savings among millennial and Gen Z investors. However, the question of ‘FD or mutual fund which is better’ doesn’t have a one-size-fits-all answer. A balanced, long-term approach to investing, combining the security of fixed-income instruments with the growth potential of equity, is often the best strategy.