Liquid Funds vs Fixed Deposits

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If there’s any investment avenue that has been popular for ages, it’s a fixed deposit. There are many reasons behind the inevitable inclination towards this asset class. Risk-free returns, comparatively better returns than the saving deposits, flexible tenor, are some of the benefits of the fixed deposit.

This investment avenue follows another popular asset class that’s considered as a better option for investors, i.e., liquid funds.

Just like the fixed deposit, liquid funds do have a set of benefits that adds value to the investment made by the investor. As the name says, they are highly liquid, can redeem the funds in T+1-day, generate substantial returns, and have no lock-in period. Though fixed deposits and liquid funds are secured investment options for investors, both of them have plenty of differences too.

You can also refer to the SWOT analysis of investment services provided by the team here at Platform Executive.

So, in this article, we’ll help you comprehend those differences, and walk you through other details of the fixed deposit and liquid funds.

WHAT ARE LIQUID FUNDS?

These funds are a part of the Mutual Funds family. If you are planning for the short-term, liquid funds should be your go-to pick investment avenue. The investors’ money is invested in debt and money market instruments like commercial papers, treasury bills, a certificate of deposit, etc. Instead of putting your surplus earnings in the bank, parking them in liquid funds will help you to accumulate your savings. All the investments made in liquid funds mature within 91 days, as the funds are parked in the short-term money market instruments mentioned above.

WHAT ARE FIXED DEPOSITS?

A fixed deposit or FD is a financial instrument that allows customers to save their part of their earnings or savings for a fixed tenure. Once the money is parked in a fixed deposit, it gets locked for a predetermined agreed period by the customer. You can keep the money in this asset class for as low as 7 days to a maximum of 10 years.

Fixed deposit returns are computed monthly, quarterly, or yearly. Senior citizen fixed deposit customers will get 0.5% additional returns over traditional customers. The interest rate for the fixed deposit changes from bank to bank.

BASIC DIFFERENCES BETWEEN LIQUID FINDS AND FIXED DEPOSITS

So far, we have discussed liquid funds and fixed deposits, followed by some of the reasons why investors, customers, and depositors prefer them over other investment options. Now, let’s dive into the differences between the two.

• Liquidity: If an asset can be converted quickly into cash, it’s highly liquid. A fixed deposit comes with a stipulated period where the depositor is refrained from withdrawing until maturity. In case of withdrawal before the prefixed period, the depositor or the customer is levied with a penalty fee. So, from this, you can comprehend that fixed deposit is less liquid in nature. On the other hand, liquid funds, one of the categories of mutual funds, have more liquidity than fixed deposits. The money invested or deposited in liquid funds can be withdrawn the next day itself. Say, you have invested in liquid funds on Monday, you can withdraw the money after 24 hours, i.e., T+1 day.
• Tax Benefit: As liquid funds come under the head of debt funds, the profit or returns earned triennially are considered as short-term capital gains. Any gains earned after three years are termed long-term capital gains. Short-term capital gains or STCG are taxed as per the Income-tax slab rate, whereas, long-term capital gains or LTCG are taxed at a 30% flat rate post indexation. In a fixed deposit, interest earned will be taxable at slab rates based on your income. You should reveal the fixed deposit interest earnings under the head “Income from Other Sources”. The fixed deposit interest is taxable at the source.
• Initial Investment: The basic investment in fixed deposit starts from Rs 1000. So here, the amount is not that big to kickstart your investment journey. The minimum investment for liquid funds is Rs 1000 via SIP and a maximum of Rs 5000.
• Return on Investment: The return on fixed deposits is far better than the earnings made on savings deposits but less than liquid funds. The interest rate for fixed deposits is fixed by the RBI in advance. However, liquid funds generate considerable returns than what fixed deposit has for you to offer.
• Risk: Fixed deposits carry very little risk as it’s operated by banks and/or non-banking financial corporations. Liquid funds carry market risk or systematic risk because they are tied up to the markets. Hence, the returns depend on how the market performs.

Compared to the fixed deposit, liquid funds are riskier, so are the returns. To put in simple words, the more the risk, the greater will be the returns, and vice-versa.

If you are an investor who’s distant from taking risks, a fixed deposit is your better investment option. But if you are willing to accumulate your wealth in the short-term and at the same time reap the benefits made from your investment, liquid funds would be an appropriate fit.

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