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Liquid Funds vs FD- Why Liquid Funds are Better than Fixed Deposits?

Figuring out where to invest can be challenging. Some people recommend fixed deposits are best, while some prefer investing in liquid mutual funds. It’s time for you to decide where you should invest- Liquid Funds or FD? Read to know which one is the better choice.

When it comes to investment, we should keep in mind that getting rich is not a quick scheme and we can only grow wealth steadily. In India, investing money is only limited to fixed deposits or recurring deposits, despite the rising popularity of mutual funds. This is mainly because these investments are the most trusted and they guarantee principal repayment without being exposed to the market fluctuations. Although the FDs and RDs promise returns, it is liquid funds that can help your money grow and help you accumulate wealth to fulfil your long-term goals.

An Overview: Liquid Funds vs FD

Let’s get to know FDs and Liquidity Funds in detail first before identifying the best among the two:

Commercial banks and small finance banks offer fixed deposits, which is a long-term investment tool for wealth creation and saving taxes. It is the most common investment avenue for several people across the world. As per a data by Reserve Bank of India, the share of FD account was around 58.2% in 2018.

Source: (https://economictimes.indiatimes.com/industry/banking/finance/half-of-bank-deposits-contributed-by-individuals-rbi-data/articleshow/65203915.cms?from=mdr)

Liquid mutual funds are debt fund comprising of treasury bills, commercial papers, certificate of deposit, etc. It is a fixed interest money market instrument with a maturity of fewer than 91 days. Despite the popularity of mutual funds, only 20 million affluent and high net-worth investors in India currently own mutual funds.

Liquid Funds vs FD Based on Various Factors:

  • Risk:

    Fixed deposits have existed in the financial market for a long time because they are risk proof. However, in the case of liquid funds, there is a moderate risk as the fund’s performance is subject to market risks, changing interest rates, etc. Liquid fund’s NAV depends on these factors; hence, opting for this type of fund can be a slight risky. Keeping the risk factor aside, you should also note that NAV of liquid funds does not fluctuate frequently.

  • Returns:

    The interest rate on the FD account is mostly in the range of 6% to 7% for general citizens and senior citizens the maximum rate is 8.05%. The rates can go up to 9%, and it usually depends on market trends. Your money will grow at a fixed interest rate throughout the tenure. Hence, it is not the best choice if you are looking for maximum returns.

    Liquid Funds generate profits at the interest rate ranging from 7% to 9%. This is better as compared to the FDs. Till now, most funds have delivered positive returns on redemption.

  • Liquidity:

    In case of emergency, you cannot withdraw money from FD before its maturity; you will lose the benefits. The bank can also impose a liquidation fee. This is same even in case of partial withdrawal of funds. It attracts 1% of penalty if you redeem it before the maturity date.

    Liquid funds prove to be useful in an emergency. You can withdraw money anytime during its short investment horizon.

  • Investment Horizon:

    The tenure of FD accounts ranges from 7 days to 10 years. You can choose the investment period depending on your needs and the minimum deposit amount should Rs.1000.

    Liquid Funds have a short maturity period, which is up to 91 days. You can start investing a minimum of Rs.1000 or a maximum of Rs. 5,000 monthly.

  • Taxation:

    You’re entitled to get tax deductions under Section 80C of the Income Tax Act; however, the returns you earn through FD is taxable. For FD accounts, if returns exceeds Rs. 10,000 per annum, the bank will levy TDS at the rate of 10%. In order to avail the tax-saving benefit, you must invest in FD with a maturity period of 5 years.

    When it comes to tax on liquid funds, the long-term capital gains are applicable for tax at an interest rate of 20%, while the short term capital gains fall under the individual tax slab category. The tax-saving benefit makes it the best alternative to Fixed Deposits.

Liquid Funds vs FD Based on Various Factors:

Fixed Deposit Liquid Fund Scheme
Avg. Rate of Return 6%-7% Upto 9%
Lock-in period 7 days to 10 Years Up to 3 months
Exit load No 1% Penalty on Redemption
Liquidity Yes No

It’s best to opt for Liquid Funds

All the above factors prove why you should choose liquid funds over FDs. Keeping aside the market risk factor, liquid mutual funds is definitely best as compared to FDs. It is a safe and secure option for investing your surplus cash for wealth accumulation or creating an emergency fund in a short time.