Liquid Funds vs Fixed Deposits

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.

• 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.

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 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.

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.

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.

A 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.

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.