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Liquid Funds Vs Fixed Deposits : Which is a better investment option?

Updated on: Jan 13th, 2023 - 7:04:56 PM

5 min read

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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

ParameterLiquid FundsFixed Deposits
ReturnsSlightly higherLower
Suitability Both short-term and long-term investorsLong-term investors
RiskMediumLow
Premature withdrawalsYes (with low penalties)Yes (with higher penalties)
Minimum investmentLowVery high
TaxationIf 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. 
Tenure7 days to 91 days7 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.

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