A fixed deposit is one of the oldest and most trusted forms of investment in India. Even with shares and mutual funds gaining the limelight, an FD has been the go-to option for investors. 

 

Over the years, different types of mutual funds also started gaining popularity for their various benefits. One such form of investment is liquid funds. 

 

When it comes to comparing liquid funds vs FD, how do you choose the better option? Read on to understand these investment vehicles, so you can decide on the FD vs liquid funds debate for yourself.

Liquid funds Vs. FD - Key Takeaways

  • Liquidity - FDs have limited liquidity, especially if you opt for a longer tenure. Premature withdrawals may incur penalties and result in reduced interest earnings. Liquid funds, on the other hand, are highly liquid. You can redeem your investment at any time, and the funds are typically credited to your account within a day.

  • Returns: FDs offer fixed and guaranteed returns. The interest rate is predetermined and remains constant throughout the tenure. Returns on liquid funds, however, are not fixed and can fluctuate based on market conditions. They aim to provide slightly higher returns than a regular savings account.

  • Risk and Safety: FDs are considered low-risk investments, especially when held in a reputable bank. They are insured up to a certain limit by government deposit insurance schemes. While liquid funds are relatively low-risk, they are subject to market fluctuations, and there is no principal guarantee. However, they are generally considered safer than many other mutual fund categories.

  • Investment Horizon: FDs are suitable for individuals with a specific investment horizon in mind. The tenures range from 7 days to up to 10 years. Liquid funds have a maturity period of up to 91 days. They are ideal for individuals who need a parking place for their funds with easy access to money for short-term financial goals.

Fixed Deposit Vs Liquid Funds

When deciding which is better, FD vs liquid fund, a comparison between the two is a must. Here is a detailed look at liquid funds vs FD.

Liquid Funds Vs FD

Aspect

Liquid Funds

FD

Scale of Returns

Higher

Lower

Premature withdrawal

With low penalties

With higher penalties

Minimum investment Value

Lower

Higher

Suitability

For both short-term and long-term investors

For both short-term and long-term investors

Risk Factor Involved

Medium

Low

Tax on liquid funds vs fixed deposits

If liquid funds are held for more than 3 years, returns are taxed at 20%

For three years or less, they are taxed as per the applicable slab rate

Interest income is added to annual income and taxed according to the applicable income tax slab rate

TDS of 10% applicable on interest earnings exceeding ₹40,000 (or ₹50,000 for senior investors)

Tax saving FD offers deductions up to ₹1.5 Lakhs

What are Liquid Funds?

Liquid funds are debt funds that invest in short-term fixed income instruments. Their maturity period is within a tenor of 91 days. Liquid funds invest in a range of fixed-income instruments, such as:

  • Commercial papers

  • High-rated corporate bonds

  • Government bonds

  • Treasury bills

For providing safety in the form of capital preservation, the funds are invested in high-rated market instruments. In addition to protection, you also enjoy the benefit of liquidity with these funds. 

 

For all these reasons, liquid funds are considered safer than other mutual funds classes. Now, your next question is sure to be, Is a liquid fund better than FD? To know the answer, read on.

Benefits of Liquid Funds

Flexible Access to Money

Liquid funds have no fixed lock-in period, allowing easy entry and exit. It is a viable investment option for those who are looking for flexible holding periods along with market-linked returns on yourREAD MORE investment.  READ LESS

Low Risk

 Investment in liquid funds generally does not experience volatility because of its shorter maturity securities. As a result, Net Asset Value (NAV) remains almost stable across different interest READ MOREcycles. However, it doesn’t mean they are completely risk-free. READ LESS

Higher Returns

Liquid funds are a preferred choice of many investors because they offer high returns. It has a GAGR of 7-9%, which is 300-500 basis points higher than what a savings bank account promises.

No Exit Load

These funds have no entry or exit load, and investments and redemptions can be made within a day. However, as mentioned in the Scheme Information document, you may be charged a fee if redemptions are mREAD MOREade in certain conditions.  READ LESS

Low Expense Ratio

As for mutual funds, liquid funds also charge an annual maintenance fee for management services. These charges are quite low, which allows you to get higher gains on their returns.

Who Should Invest in Liquid Funds?

As compared to other mutual funds, liquid funds are safer. You can go for liquid funds If you have a low to medium risk appetite and want to invest any surplus or idle amount. These funds offer better growth of your investment, beating the returns of any savings account. 

 

In terms of liquid fund returns vs FD, a liquid fund usually offers better returns than a fixed deposit. So, to answer your query, “Is a liquid fund better than FD?”, make sure you understand fixed deposits better.

What are Fixed Deposits?

In a fixed deposit, you deposit a lump sum amount at a predetermined rate of interest and for a fixed tenor.

 

You get the interest income along with the invested amount at the time of maturity. You may also choose to receive your interest income in periodic intervals like monthly, quarterly, half-yearly or annually. 

 

Almost all banks and several NBFCs provide the facility of starting a fixed deposit. The interest rates offered for FDs are also higher than that of a normal savings account. You can calculate the returns using the fixed deposit interest rates calculator, making the computation easier.

Benefits of Fixed Deposits

Fixed Deposits have several benefits that have continued to attract investors over the years. Here are some of them:

  • Zero Risk: Fixed deposits are the best investment option if you are looking to invest in a stable scheme offering assured earnings. This is because your returns are not linked to the market and the interest you earn is fixed at the time you start your deposit.  

  • Easy Process: You can open your FD account easily by visiting any bank branch or NBFC branch and filling out the form. You can also book a fixed deposit online, without having to step out of your home. This makes starting an FD really convenient. 

  • High Returns: You can currently enjoy high interest rates of up around 8% to more on fixed deposits. As a senior citizen, you can also get an interest rate benefit from issuers that helps to increase your returns. This way, FDs can provide better returns than any savings bank account.

  • Tax-Saving Instrument: FDs may also allow you to reduce your tax liability. By choosing a 5-year tax-saver FD, you can enjoy a tax deduction of up to ₹1.5 Lakhs as per Section 80C of the Income Tax Act.

  • Avail Loans Against FD: To finance your expenses or emergencies, you can take a loan against your fixed deposit too. Most issuers offer a loan of up to 85%-90% of your deposit amount as credit. 

  • Easy withdrawal: To meet sudden needs, you can also prematurely withdraw your FD by paying a small penalty. This allows you to enjoy liquidity when you need it. 

Read More

Who Should Invest in a Fixed Deposit?

fixed deposit is ideal if you have zero to low risk tolerance. It is a safe investment tool as banks offer FDs under the purview of the Reserve Bank of India. You can also check credibility ratings by CRISIL and ICRA when choosing an FD from NBFCs to ensure safety.

 

If you are looking for long-term investment with assured returns and a low risk quotient, you should go for a fixed deposit.

Conclusion

When it comes to liquid funds and FDs, both are good additions to your investment portfolio. In a nutshell, a fixed deposit is a safer choice even though liquid funds offer the opportunity for better returns.

 

In terms of a long-term investment, FDs may be better if you are risk averse. For shorter tenures, liquid funds may be a better choice. In the end, it comes down to choosing the right option based on your financial goals and risk appetite.   

 

Find the range of investment avenues on Bajaj Markets that suit your goals. Keep in mind that a popular choice is the Bajaj Finance Fixed Deposit, which offers some of the best interest rates in the market. 

Disclaimer

The information provided by BFDL herein above is related to the Non-Partnered Banks/ NBFCs and is just for the purpose of information and under no circumstances the information provided hereinabove is intended to be source of advice or recommending any financial investment advice or endorsement of any sort. 

The information including interest rates with regard to fixed deposit, provided on this website is gathered through publicly available sources over the internet and is considered as accurate and reliable to the best of our knowledge. BFDL disclaims any responsibility or liability regarding inaccuracies, omissions, mistakes etc. as well as offers by the Non-Partnered Banks. The use of information set out is entirely at the User’s own risk and User should exercise due care prior taking of any decision, on the basis of information mentioned hereinabove. You are advised to visit/ contact the respective Banks/ NBFCs to verify the information before making any investment or opening an account. Further, BFDL does not undertake any responsibility or liability to update this information. YOU ARE SOLELY RESPONSIBLE FOR ANY LIABILITY OR DAMAGE YOU INCUR THROUGH ACCESS TO OR USE OF THE SITE OR SUCH INFORMATION OR MATERIALS EXCEPT WHERE THE LAWS AND REGULATIONS OF A PARTICULAR JURISDICTION CONCERNING WARRANTIES CANNOT BE WAIVED. Additionally, display of any trademarks, tradenames, logo and other subject matters of intellectual property owners. Display of such Intellectual Property along with the related product information does not imply BFDL’s partnership with the owner of the Intellectual Property of such products. 

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FAQs about Liquid Funds Vs FD

Can I lose money in liquid funds?

Liquid funds are considered one of the safest in the category of mutual funds. Due to stringent regulation and selection of the instruments they invest in, the possibility of losing money is almost nil. This is especially true if you invest for a short duration.

How does a liquid fund work?

A liquid fund is a debt fund that invests your amount in fixed-income instruments for a short time period. These instruments are treasury bills, commercial papers, high-rated corporate and government bonds and more.

When does a liquid fund mature?

Liquid funds have a maturity of up to 91 days.

Can I keep ₹50 Lakhs in FD?

Yes, you can invest ₹50 Lakhs in an FD as there is generally no upper limit on the deposit amount.

Can I add money to the fixed deposit?

No, you cannot add money to an ongoing fixed deposit. You will have to start a new fixed deposit investment. You can also invest in the SDP scheme (Systematic Deposit Plan) by Bajaj Finance to invest on a monthly basis.

Is it safe to invest in liquid funds?

The returns on liquid funds are generally stable as the tenor is short. In fact, they are the safest mutual funds you can choose! 

What are the things you need to consider before investing in liquid funds?

When investing in liquid funds, you must consider risks, returns, size of fund, and expense ratio.

Why are liquid funds better than an FD?

Liquid funds and FDs serve different goals. While you may get market-linked returns generally higher than FDs in liquid funds, they are not totally risk free. FDs offer safety away from market volatility for the short, medium and long term.

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