When it comes to short term investing you want to choose the best option for you. Over the years, Liquid Funds and Fixed Deposits (FDs) have become the most popular choices for Indian investors.
Ease of access, security, and return on investment are some of the common factors that investors consider when evaluating these two investment options. But which one is better for you?
This article will compare Liquid Funds and FDs to help you make an informed decision.
What are Liquid Funds?
Liquid funds are mutual fund schemes that invest in money market instruments such as treasury bills, psu bonds, commercial papers, certificates of deposits (CDs), etc., with a maturity period of up to 91 days. These funds provide higher returns than bank savings accounts yet are considered liquid assets since they can be easily converted into cash when needed.
What are FDs?
Fixed Deposits, or FDs, are a type of investment wherein you deposit your money with a financial institution such as banks, NBFCs (Non-Banking Financial Companies), and post offices in India. You receive interest payments on regular intervals—monthly/quarterly/annually—for the duration you lock in your deposit.
Benefits of Liquid Funds vs Benefits of FDs
Liquid Fund schemes offer better returns than Fixed Deposits due to their exposure to debt instruments with higher interest rates. Moreover, these funds have the flexibility to move between different kinds of debt instruments depending on their current market conditions, so investors do not need to manage their portfolios manually.
On the other hand, FDs offer high security since most financial institutions are insured and regulated by the Reserve Bank of India (RBI). Furthermore, they provide steady returns over a fixed period, making them perfect for someone looking for regular income.
Comparison Between Liquid Funds and Fixed Deposits
Investment Horizon:
Liquid Funds are suitable for short-term investments since they have a maximum maturity period of 91 days. On the other hand, fixed deposits can be locked in for up to 10 years or more, making them better options for long-term investments.
Risk:
Liquid Funds carry a higher risk level than FDs because they are exposed to debt instruments that may default if market conditions suddenly change. FDs offer lower levels of risk since RBI and financial institutions insure them.
Taxation:
Any interest you earn from fixed deposits is added to your annual income and then taxed according to the relevant tax bracket. The bank/NBFC deducts 10% TDS from your overall tax liability when you’re paying or accruing interest. At the end of every year, it’s important to remember that this deducted amount needs to be subtracted from your total obligation and then paid with whatever balance is left over. If there tenure is less then three months the taxation for both FD and liquid funds are identical.
Liquidity:
Fixed deposits come with a pre-defined tenure, and the interest rate is based on the principal amount and how long you keep your money in this type of deposit. However, if you choose to withdraw your funds prematurely from your FD, the bank will charge a penalty (usually a percentage of the applicable interest).
Liquid funds offer better liquidity because the exit load (a penalty imposed for early withdrawal) is much lower than an FD. Few liquid Funds come with a graded discharge load of up to six days without an exit charge after 7th day. Additionally, you can access your funds within 24 hours, whereas it will take several days to receive your money back in the case of FDs.
So, Which One is Better for You?
The answer to this depends totally on individual needs. FDs may be the way to go if you are looking for capital protection. However, if you’re looking for better returns with less risk, then Liquid Funds may be a better option.
We recommend you do your due diligence before making an investment decision and consult a qualified financial advisor if necessary.
