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Difference Between Liquid Funds and Fixed Deposits
Posted on Wednesday, July 31st, 2024 | By IndusInd Bank
In India, FDs and liquid funds are the top investment choices. FDs offer guaranteed returns, a safe bet for cautious investors. Liquid funds attract those seeking short-term investments with higher returns.
This guide explains FDs and liquid funds, benefits, and key differences. If you find it difficult to decide between safety and returns, this guide is for you.
How Do Liquid Funds Work?
Liquid funds, also called money market funds, invest in debt securities. These include commercial paper, bonds, and government securities. A fund manager manages them, and they have a 91-day maturity. Hence, they are ideal for idle cash. Also, there is no lock-in period, and they offer stable returns from highly rated securities.
What Are Fixed Deposits?
A fixed deposit is a risk-free investment opportunity that offers a fixed rate of interest. FDs provide guaranteed returns, but the amount is locked in for the duration of the deposit. While it allows premature withdrawals, it attracts penal charges.
Additionally, interest rates also change periodically but do not vary during the tenure of an FD. Moreover, the interest is also subject to tax.
Before you make any financial commitments, it’s wise to utilise a Fixed Deposit Calculator. It helps to estimate potential returns and make informed investment decisions.
Also read: Risk and Returns: A Comparative Analysis of FDs and RDs
Comparing Fixed Deposits and Liquid Funds
When you evaluate investment options, it’s essential to analyse liquid funds vs fixed deposits. It will help determine which will suit your financial needs and risk appetite better.
Risk and Returns:
Fixed Deposits (FDs): Offers guaranteed fixed returns at minimal risk and is ideal for conservative investors but offers lower returns.
Liquid Funds: Offers higher returns with more risk due to market volatility. Suitable for those comfortable with some risk.
Liquidity:
FDs: Offers less liquidity with penalties for premature withdrawals.
Liquid Funds: Offers high liquidity with easy withdrawals after seven days and no penalties.
Investment Horizon:
FDs: Best for long-term investments, ranging up to ten years.
Liquid Funds: Are designed for short-term needs, typically up to 91 days.
Taxation:
FDs: Interest is subject to TDS if it exceeds ₹40,000 (₹50,000 for senior citizens) and is taxed as per income tax slabs.
Liquid Funds: Taxed based on the holding period. Short-term gains are taxed according to the income tax rate; long-term gains are taxed at 20% with indexation benefits.
Considerations Before Investing
When you weigh the pros and cons of different investment avenues, it’s wise to compare liquid funds vs. FD to make an informed decision tailored to your financial objectives.
For Fixed Deposits (FDs):
- Economic Conditions: FD rates fluctuate with national economic trends. Economic growth can lead to higher rates, while downturns may reduce them.
- Monetary Policy: Changes in the central bank’s repo rate directly affect FD rates. Higher repo rates mean higher FD returns.
- Inflation: High inflation rates can erode FD returns over time. Consider inflation-adjusted returns when evaluating FDs.
For Liquid Funds:
- Investment Horizon: Match your investment period with your financial goals, as liquid funds are suitable for short-term needs (up to 91 days).
- Fees and Expenses: Watch for management fees and other costs that can impact your savings.
- Liquidity Risk: Although liquid funds offer high liquidity, returns can fluctuate with market conditions.
- Returns: Liquid funds may offer higher returns than FDs but do not guarantee fixed rates.
Choosing between FD or liquid funds depends on your investment horizon and risk tolerance, as FDs offer stability while liquid funds provide flexibility and potentially higher returns.
Ready to secure stable returns? Consider investing in an IndusInd Bank Fixed Deposit today and take a step towards financial stability and growth.
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.