Liquid funds vs fixed deposits: Where should you invest in?
Fixed deposits ruled the investment arena for a long time. They were the go-to names for gaining steady returns much before the funds set their footings into the market. Among those funds are the liquid funds that share more or less similar risk probabilities as FDs. In today's time, both investment options are equally popular and considered the safest medium to enter into the investment journey. But, when it comes to making decisions from Liquid funds VS FD, investors often struggle to find their way out.
To make things easier for you, let's explore both the investment options with a closer eye. For starters, let's understand fixed deposits and liquid funds.
Fixed deposits: These are a form of bank deposits. Here investors can invest or deposit a lump sum amount for a fixed, predefined time (usually between 7 days to 10 years). Investors may opt to receive monthly interest payouts or total interest at the end of tenure. With fixed deposits, you receive more interest than a regular savings account.
Liquid funds: These funds are a subclass of debt funds intended for a short-term investment, a maximum of 91 days. Liquid funds majorly deal with money market instruments such as certificates of deposits, commercial papers, and treasury bills. These funds are the safest among the mutual fund category because of their ability to minimize the market volatility risk.
Who should invest in fixed deposits?
Fixed Deposits are an ideal investment option for investors who want to ensure steady returns for themselves in the long term, say 1-10 years. Also, for investors who are looking to save their money and avoid the risks that come with mutual funds, it's the best option to go for.
All in all, fixed deposits are ideal for investors who:
- Want to save money
- Fall into a low or zero-risk appetite.
- Have taxable income and looking for a tax-saving investment instrument
- Want to ensure a regular source of income for themselves
- Want to invest in a long-term
Benefits of fixed deposits
Fixed deposits have a lot of benefits that investors can reap while investing.
- Safest investment: Fixed deposits are comparatively safer than other investment options.
- Low-interest risk: Interest rates of fixed deposits are unaffected by market fluctuations. It remains the same until the tenure.
- Compounding effect: When you choose a reinvestment option in your FD, you can enjoy the magic of compounding. It means that you not only receive interest from your principal amount but from its interest too.
- Regular source of income: Investors can opt for monthly or quarterly interest payouts and enjoy a consistent source of income as part of retirement or for general expenses.
- Tax benefits: If you have a taxable income, you can opt for a tax-saving FD scheme and benefit from certain exemptions under section 8C of the income tax act.
Who should invest in liquid funds?
Liquid funds are ideal for investors with excess cash who are looking for short-term investment options (less than three months investment horizon). Also, investors who want to experience the equity market without exposing themselves to the higher risk can look for this investment option. As the name suggests, liquid funds are highly liquid, making them a great resort for resources for emergency purposes.
All in all, liquid funds are ideal for investors who
- Have substantial cash at hand
- Want to gain exposure to equity funds without being completely exposed to risk
- Need investment instruments for short-term wealth generation.
- What to keep their investment for emergency purposes
- Need a flexible investment option
Benefits of liquid funds
Liquid funds present investors with a lot of benefits that they can reap while investing.
- No Lock-in Period: One of the biggest pros of liquid funds is the ease of redeeming the fund units. Liquid funds don't have a lock-in period which facilitates investors to cash through their fund units when needed.
- Easy redemption of fund units: One of the reasons why these funds are called liquid is their ability to dissolve the holdings into cash. Investors can redeem their units even within one day of investment.
- Low-interest rate fluctuations: Since liquid funds come with a small maturity duration (max 91 days), they conveniently surpass the interest rate fluctuations.
- Tax Benefits: Liquid Funds offer more tax benefits on returns than saving accounts.
- Better Returns: Liquid funds offer higher returns in a short duration. One can expect an approximate return of 7-8% per annum from their investments.
- No Entry and fewer exit load charges: There is no entry load in liquid funds. Besides, exit load also involves fewer penalties. However, it is important to read the find document and check the exit load, if any.
Liquid funds VS fixed deposits: Comparison of various parameters
The following table classifies the liquid funds and fixed deposits on various parameters to bring better clarity to your investment decision.
|Parameters||Fixed Deposits||Liquid funds|
|Returns||Offers decent return, more than a savings account||Offers higher returns than fixed deposits|
|Risk Involved||Lowest||Higher than fixed deposits|
|Investment Horizon||7 days - up to 10 years long term investment||Up to 91 days short term investment|
|Ease of redeeming investment||You can redeem your investment, but you have to pay a high penalty||You can redeem fund units without significant exit penalties|
|Taxation on gains||The interest is added to your annual income and taxed as per your income tax slab after deducting the TDS. With tax-saving FDs, you can claim up to Rs 1.5 lakh under section 8C of the income tax act.||Gains get taxed as per your holding period. The profits generated from the investments get taxed at 20%. A holding period of 3 or fewer years attracts tax equivalent to your income tax slab.|
Is liquid fund better than FD?
The investment purposes of both liquid funds and FD are different. In the case of liquid funds, investors have the opportunity to earn better returns than FDs. They are highly liquid and offer indexation benefits. Having that said, liquid funds are riskier than FDs because of the equity component, which is prone to market fluctuations.
You can choose a fixed deposit if you are an investor who wants to generate stable and steady returns without being exposed to the risk of market volatility. However, here your potential to generate exponential returns is limited. Plus, there is a strict lock-in period, which makes them less preferable concerning emergencies and cash crunch. In the end, both investment options have their fair share of pros and cons. It is up to you to choose the best option for wealth maximization based on your portfolio and wealth generation goals.
We hope the above information has brought clarity between the two investment options FD VS liquid funds. Before you invest, make sure you compare and assess the available options to make the best investment decision for yourself, which offers you the lowest risk and return at your end.
Still, have queries? Check out this FAQ section to see if you got you covered.
What is the minimum amount required to start a Fixed deposit?
The minimum deposit amount for most banks is as low as Rs 5000.
Can I continue with my FD once its tenure is over?
Yes. You can select the auto-renewal feature. It allows you to continue with your FD for the same time and interest rate. You can also start a new FD with a different amount and lock in time.
How to choose the best liquid funds?
Before selecting liquid funds for your portfolio, analyze your investment options carefully. Some of the features you should check in a fund scheme such as what portfolio diversification opportunities it offers, fund size, returns, expense ratio, etc.
How to invest in liquid funds?
You can make liquid fund investments directly through the fund house's online platform, broker, or third-party platforms such as Glide Invest. You have an option to choose direct or regular investment plans.
Do liquid funds have a lock-in period?
Liquid funds don't come with a lock-in period.