This is a great question. The short answer is this: If your corpus is small (< 3 lacs) and if the time horizon is less than 3 years, it can be simpler to park the money in a high interest savings account. Before we see the longer answer, let us look at some tax and risk related factors.
- Interest from savings account is tax free upto Rs 10,000 in a year.
- Every rupee of interest from fixed deposit is taxable.
- In all cases, interest income is added to your total income. So the tax on it is your marginal rate of tax i.e if you are in the 20% tax bracket, bank interest income would be charged at 20%.
- Interest is considered for tax every year based on accrual, even if has not been paid out. Of course, savings interest is paid out every quarter.
- Debt mutual funds are taxed differently. Gains from the funds are taxed as capital gains.
- If you redeem the mutual fund within 3 years, the gains are considered short term. The tax rate on this is like the tax on interest - your marginal tax rate.
- If you hold the fund for 3 years or longer, the gains are considered long term. The tax rate is 20% with indexation. In most cases the indexation would make the tax rate 10% or lower.
- Deposits upto 1 lac per bank are insured. The insurance covers all the scheduled banks and most co-operative banks. The deposits can be savings, FD, or RD.
- This insurance is provided by DICGC - Deposit Insurance and Credit Guarantee Corporation (https://www.dicgc.org.in/FD_A-GuideToDepositInsurance.html)
- Mutual funds of course are market instruments. The investor bears all the risk. If there is a default by the company that the mutual fund lent to, the investor finally bears the loss.
Summary of risk and taxation considerations
- Principal of about 1.4 lac would have tax free interest if parked in savings account. Interest on principals above this would be taxable. Taxation is same regardless of the tenure of deposit.
- If the tenure is longer - 3 years or more - debt mutual funds have a better taxation, except of course for the people who are in the 5% tax bracket.
- Bank accounts are risk free only upto 1 lac per bank. if you have a principal of 2.5 lacs and want zero risk, you should deposit them in 3 different banks.
With the above summary, the short answer is explained clearly. If you have a larger corpus amount, say 4 lacs, and want to park if for more than 3 years, debt mutual funds may be simpler for you. To keep them in savings, you would have to use 4 different banks, and also pay tax every year at the marginal rate. On the other hand, if your corpus is 2 lacs or so, it is much simpler to keep it in savings banks.