Liquid Funds vs. Fixed Deposits(FD): Deciding the Best Option
Updated: Oct 27
Fixed deposits are the most traditional and reputable type of investment in India. Fixed deposits were the standard option for investing and reliable returns prior to the popularity of shares and mutual funds. Fixed deposits provided a number of advantages, such as low risk, acceptable rates, and high liquidity. Different kinds of funds have been introduced over time to meet the needs of various investor types, especially those that choose FDs.
Most investors compare liquid funds to fixed deposits since they have a risk profile that is comparable to that of an FD. A new regulation that applies to matured, unclaimed FD accounts has been notified by RBI. In other words, the money in an unclaimed, matured savings account will earn interest at the savings account's rate or, if it is lower, the contracted rate of the matured savings account. We will compare different investing possibilities in this article to assist you in making an informed decision.
Table of content
What are Liquid Funds?
Investing in short-term guaranteed income money market products like government and corporate bonds with excellent ratings, commercial papers, and Treasury bills is what liquid funds do. The investments made by liquid funds mature in ninety-one days. Liquid funds' primary goal is to offer protection through capital preservation. These funds invest in well-regarded money market securities as a result. Since they are less risky than other mutual fund classes, liquid funds are therefore thought to be.
Key Features of Liquid Funds
Liquidity: Investors can promptly, frequently within a day, redeem their assets from liquid funds. They are a great option for storing extra money or emergency savings because of this capability.
Low risk: Liquid funds are less risky than other investing options like long-term debt funds or equity since they invest in short-term debt securities with excellent credit ratings.
Stable Returns: Over time, liquid funds hope to generate returns that are steady and constant, even though they might not give incredibly large returns right away.
No Lock-In Term: Liquid funds, in contrast to mutual funds, do not impose a lock-in term, allowing investors to take their money out whenever necessary.
Tax Efficiency: Liquid funds are more tax-efficient for investors in higher tax rates since their gains are taxed at a lower rate than those of mutual funds.
Who Should Choose Liquid Funds?
Those who are risk-averse and would like to park their excess or idle cash may want to consider investing in liquid funds because they are comparatively safer than other mutual funds. When considering bank account options, these funds are a great choice because they provide better returns than standard savings accounts. Investments with incentives, bonuses, or any other proceeds from the sale of stocks or other assets could be an option.
Benefits of Liquid Funds
It is believed that liquid funds yield higher returns for investors than current accounts and savings accounts.
The fact that they are invested in securities with a good credit rating makes them less volatile.
There are no exit loads for liquid funds.
91 days is the maturity date of a liquid mutual fund
These types of money are liquid and can be returned in a single day.
Variations in interest rates have no effect on them.
Professionals are in charge of managing these funds.
The minimum investment amount in liquid funds is Rs 500.
They provide alternatives for both growth and dividends.
Unlike normal fixed deposits, which have a seven-day lock-in period and a penalty for early withdrawal that must be paid, liquid funds have no such clause.
What are Fixed Deposits
A common type of bank deposit is a fixed deposit. This allows users to deposit a large sum over a predetermined length of time and earn interest rates far higher than those offered by standard savings accounts. Fixed deposits are provided by some financial institutions and all banks. One can choose to get interest accrued at the conclusion of the fixed deposit term, or interest on a recurring basis. If investors are willing to forgo a fixed rate of return, they may opt to invest in fixed deposits.
Key Features of Fixed Deposits
Fixed term: Depending on the investor's option, FDs have a defined term that might range from a few days to several years. During the term, the interest rate stays the same.
Guaranteed Returns: Regardless of market changes, one of the primary benefits of FDs is the guarantee of a predetermined interest rate on the investment.
Low to Moderate Risk: Since fixed-date accounts are not impacted by market swings, they carry comparatively little risk. However, because of inflation and interest rate fluctuations, they come with certain dangers.
Early Withdrawal: Although fixed-rate bonds (FDs) provide stability and guaranteed returns, early withdrawal may result in penalties or lower interest rates, which could affect total returns.
Implications on Taxes: Interest received from FDs is subject to tax based on the individual's income tax slab rate.
Who Should Choose Fixed Deposits?
Those who are unwilling to take on any investing risk could consider fixed deposits. Since fixed deposits are provided by banks, the Reserve Bank of India will always have jurisdiction over them. To make sure they are safe, it is crucial to verify ratings like the CRISIL rating if one is investing in fixed deposits provided by an NBFC. If one is seeking long-term investment possibilities, fixed deposit investing is a great choice.
Benefits of Fixed Deposits
There are several advantages to fixed deposits, some of which are stated below:
When it comes to savings options, fixed deposits are thought to be the safest choice.
The fixed deposit account's interest rate stays constant over the predetermined period, even in the face of market changes.
Customers who have fixed deposit accounts can instruct banks to credit the cash or reinvest it for a further predetermined period of time when the account expires.
The interest rate on FDs is guaranteed.
Several banks provide tenure ranging from seven days to ten years.
A number of institutions provide fixed deposits that have tax advantages.
To determine the interest, they would get on the amount deposited, customers can use the FD calculator on the website of the relevant bank.
Banks give their clients the freedom to select the fixed deposit tenure.
Liquid Funds & Fixed Deposits: A Comprehensive Comparison
The following table shows a detailed comparison between fixed deposits and liquid funds:
Feature | Fixed Deposits | Liquid Funds |
Risk | Low risk | Higher risk compared to FDs |
Returns | Fixed rate of return | No guaranteed returnsOffers better returns than fixed deposits |
Liquidity | The maturity period of fixed deposits ranges from seven days to ten years, depending on the bank. Also, there is a penalty for premature withdrawal. | An exit load is applied to money redeemed within a week of being held. There is no exit load on the redemption after the seventh day. They provide increased liquidity |
Tenure | Ranges from seven days to ten years. | Have a maturity of up to 91 days. |
Taxation | Your annual income is increased by the interest you earn on fixed deposits, which is then taxed based on the relevant tax slab. Also, 10% TDS is subtracted by the bank or NBFC each time interest is accrued or paid out. You must pay the difference after deducting the TDS amount from your total tax liability at the end of the year. In accordance with Section 80C of the Income Tax Act of 1961, you may also invest in a tax-saving fixed deposit with a three-year lock-in and receive tax deductions of up to Rs. 1.5 lakh. | If you keep assets in liquid funds for more than three years, your earnings will be taxable at 20% after indexation as long-term capital gains. However, returns on assets held for a period of three years or less are subject to taxation based on your applicable income tax slab. |
Conclusion
Both FDs and liquid funds have benefits and are suitable for different types of investors. Choosing an investment option that fits your financial goals and diversifying your assets are two ways to maximise the performance of your investment portfolio. You may minimise risks and maximise profits while achieving both short- and long-term financial goals with a well-balanced approach to investing. A financial advisor should be consulted in order to develop an investment plan that is specific to your requirements.
FAQ
Q1. Can a salaried professional invest in liquid funds?
Yes, professionals on salaries are able to invest in liquid assets. Investors looking to create emergency cash or make short-term investments might consider liquid funds.
Q2. What is the maturity period of liquid funds?
A liquid fund's maturity is ninety-one days.
Q3. When does the amount of an FD mature?
A fixed deposit's maturity is determined by the initial tenure selection. Banks typically provide FD tenures of seven days to ten years or longer.
Q4. How do liquid funds compare to FDs in terms of liquidity?
A particular kind of mutual fund called a liquid fund makes investments in short-term debt instruments so that investors can easily access their money. Though they could have restrictions on redemption, they are typically more liquid than fixed deposits.
Q5. How do the returns on liquid funds compare to those on FDs?
Fixed deposits might not yield as high of returns as liquid funds can, especially when interest rates are low. However, there is no guarantee and there may be fluctuations in the returns on liquid funds.
Q6. How do the fees and charges of liquid funds compare to those related to FDs?
Due to their competent management and reduced operational costs, liquid funds often have fewer fees and charges than fixed deposits.
Q7. How do the risks linked with liquid funds compare to the risks of FDs?
While fixed deposits are low-risk investments with guaranteed returns, liquid funds are vulnerable to market hazards.
Q8. What factors should an investor bear in mind when choosing between investing in liquid funds vs FDs?
Selecting between liquid funds and fixed deposits requires investors to weigh factors. These include possible returns, risk, fees and charges, liquidity, financial goals, and time horizon, as well as the stability and reputation of the financial institution.
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