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Mutual Find MIPs vs Bank FDs

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The interest income you earn from bank fixed deposits is added to your taxable income and taxed at the rate you fall under. Hence, if you don't pay taxes and the interest income is unlikely to take you beyond the tax eligibility threshold, then the FD income will be tax-free. But if you fall in the 30 per cent tax bracket, the interest income will be reduced by 30 per cent.

Compared to that, your interest income from MIPs held for more than one year will be subject to either 10 per cent flat capital gains tax or 20 per cent post indexation. So if you're in the higher tax bracket, MIPs might be more useful.

But there is a significant difference between the two when it comes to their risk attributes. Fixed deposits safeguard your capital and guarantee an interest. Compared to that, MIPs are volatile because they are 85 per cent into fixed income and 15 per cent into equity, and the combination of these two can result in decline of value over a shorter period of time.

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