Liquid Funds Vs Fixed Deposits
Fixed Deposit, also known as FD, is a popular saving instrument provided by banks (both public and private) for both short-term and long-term investments. The rate of interest is fixed and pre-decided by the Indian Government, thus, the growing inflation doesn’t impact the return on these investments. Be notified that, the FD returns are taxable, but some Tax Saver FD investments are eligible for tax-deductions under section 80C.
Liquid Funds are basically debt mutual funds, which invest money in very short-term market instruments such as treasury bills, call money and government securities. These funds invest in instruments with a maturity of 91 days. The returns in the scheme are quite impressive, because the investment doesn’t get affected by market movement. Liquid funds are considered as hedge funds for common people, as it implies typical hedge fund strategies in a mutual fund format with daily liquidity.
The War Between Liquid Funds & Fixed Deposits. Here:
- Liquidity & Lock-in-Period: From a few words, liquidity is known as the level of ease wherein funds can be withdrawn from the investment. Talking about liquid funds, it has high-liquidity as compared to fixed deposits. Typically, a fixed deposit comes with a lock-in-period of 1-5 years. If the depositor wishes to withdraw his/her money before the time-period, they would be liable to pay the additional fee or penalty to avail it.
- Risk Factor: Investment in fixed deposit is considered as almost risk-proof, which is why investors with a conservative investment portfolio are attracted to them. Talking about liquid funds, it is slightly risky because they are subjected to the fluctuating rate of interest, price, etc., that influence their NAV.
- Returns on Investment (ROI): When it’s about ROI, the interest rate on fixed deposit is pre-determined by financial institutions that is based on the time-horizon of the deposit. Whilst, for debt funds, the same depends on the overall interest rate that is pre-valent in the investment market. Currently, the rate of returns applicable to both liquid funds and fixed deposits are 7% approximately (they can differ accordingly).
- Taxation Benefits: Coming to tax on liquid funds, the investors can avail tax-benefits, which will help them in lowering down their tax-related expenses. In the case of a fixed deposit, the returns earned through the deposit are added to the aggregate income of the investor. But the total is subjected to the tax rate that is pre-determined by their tax slab.
On That Note: The answer to the question, ‘which is better – Fixed Deposit or Liquid Fund?’ can be figured-out easily, only if you consider the endless benefits that come along with it like high-liquidity, short time-horizon, and tax advantages.
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