Liquid Funds Vs Fixed Deposits : Which is a better investment option?
Updated on: Jun 9th, 2024
|
1 min read
Liquid funds and fixed deposits are two of the most popular investment options that are considered to be safe.
Latest Update
RBI has announced a new rule applicable to unclaimed, matured FD accounts. That is the funds in an unclaimed, matured FD account will attract an interest rate as applicable to the savings account or the contracted rate of the matured FD, whichever is lower.
What are Liquid Funds?
Liquid funds are a class of debt funds that invest in short-term assured interest providing money market instruments such as treasury bills, commercial papers, high-rated corporate and government bonds. The instruments that liquid funds invest mature within a timeframe of ninety-one days.
The main objective of liquid funds is to provide safety in the form of capital preservation. It is for this reason that these funds invest in high-rated money market instruments. Hence, liquid funds are considered to be relatively safer than any other class of mutual funds.
Who Should Invest in Liquid Funds?
As liquid funds are relatively safer than other mutual funds, investors who are risk-averse and looking to park their idle or surplus cash may consider investing in liquid funds. These funds are an excellent option when compared to a regular savings bank account as liquid funds offer much higher returns than the latter. One may consider investing their incentives, bonuses, or any other gains that have resulted due to selling the securities or assets that they hold.
What are Fixed Deposits?
Fixed deposits are a popular form of bank deposits. Under this, individuals deposit a lump sum over a fixed period of time to earn much higher interest than what regular savings accounts provide. All banks and some financial companies offer fixed deposits.
One may opt to receive interest on a periodic basis or receive the interest accrued at the end of the tenure of the fixed deposit. The investors can choose to invest in fixed deposits if they are ready to compromise on receiving a fixed rate of return.
Who Should Invest in Fixed Deposits?
Fixed deposits are suitable for those who are not ready to bear any risk with their investments. As fixed deposits are offered by banks, they will always be under the purview of the Reserve Bank of India. However, if one is investing in fixed deposits offered by an NBFC, then it is essential to check ratings such as CRISIL rating to ensure that they are safe. Investing in fixed deposits is an excellent option if one is looking for long-term investment options.
Comparison of Liquid Funds With Fixed Deposits
| Parameter | Liquid Funds | Fixed Deposits |
| Returns | Slightly higher | Lower |
| Suitability | Both short-term and long-term investors | Long-term investors |
| Risk | Medium | Low |
| Premature withdrawals | Yes (with low penalties) | Yes (with higher penalties) |
| Minimum investment | Low | Very high |
| Taxation | If held for over 3 years then taxed as LTCG @ 20% after indexation. Otherwise taxed at slab rates. | Taxed at slab rates as Income from Other Sources. TDS may be applicable if interest income exceeds a certain threshold amount. Tax Saving FDs have a lock-in period but can provide 80C deductions. |
| Tenure | 7 days to 91 days | 7 days to 10 years |
Conclusion
Both liquid funds and fixed deposits are excellent risk-averse investment options. If you're looking to invest for long term then go for fixed deposits. However, if you're seeking short term investments with stability, go for liquid funds. Investors must assess investment horizon before choosing to invest in any.
Quick Summary
Liquid funds invest in short-term instruments with safety in capital preservation, ideal for investors seeking higher returns than savings accounts. Fixed deposits offer higher interest over a fixed period but have penalties for premature withdrawals. Fixed deposits suit risk-averse investors while liquid funds cater to short-term and long-term investors.
Was this summary helpful?
Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.
Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.
CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.
Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.
Cleartax is a product by Defmacro Software Pvt. Ltd.
Company PolicyTerms of use
ISO 27001
Data Center
SSL Certified Site
128-bit encryption