Fat does not “turn into” muscle – ever. One way you can lose fat by increasing cardio and being sure to have healthy WHOLE FOOD FATS (avocado, nuts, in your diet). It is also extremely important to cut sugar. Decreasing calorie intake just causes your body to create more cortisol which, in turn, INCREASES fat stores.
A second (and better) way to lose fat is to actually increase muscle as a pound of muscle burns more calories at rest than a pound of fat so you increase your ‘resting metabolic rate.” This is the rate at which your body burns calories at rest
You do not have to worry about becoming bulky or “muscle-bound” as it would take a lot more than you could possibly do on your own without seriously trying and, if you are female, it’s even more difficult since women have less muscle fibers than men to begin with.
Finally, despite what oomis has said , a pound is a pound, whether it is a pound of muscle or a pound of fat. The difference is that muscle takes up LESS space so you can stay the same size or even get smaller yet weigh more because you have 2 pound of muscle where 1 pound of fat used to to be.
But, in order to build more muscle you need to lift heavier weights as well – 20 reps w/ 5 pounds is waste of time. 8 reps w/12-20 pounds is faster ( ask long as you can maintain proper form) and will get you better results.
Hope this helps.