Liquid Funds vs Fixed Deposits
Liquid funds and fixed deposits are the two widely opted investment options in India. Both aid people in making great investments. It is important to know more about both fixed deposits and liquid funds if you are someone planning to choose either of these for investment. Here, we will be discussing the features, benefits, risks, and core differences between fixed deposits and liquid funds:
What are Liquid Funds?
Liquid funds are debt mutual funds that invest in short-term money market instruments. They include government bonds, treasury bills, and certificates of deposit. Liquid funds are medium risk and offer a maximum maturity period of 91 days. They do not have entry or exit loads, and the minimum amount needed to invest varies according to each programme. Liquid funds protect the capital and provide short-term capital gains.
What are Fixed Deposits?
Fixed deposits are a more conservative way of investment in India, which is familiar to most people. It is a bank deposit where people can deposit a sum of money for a specific tenure to earn higher interest on the amount. Fixed deposits are long-term and have low risk. Fixed deposits offer a guaranteed return and a lower chance of capital loss. The interest earned depends on the amount and the period of investment. Fixed deposits are considered one of the safest investment options that give long-term yet flexible tenures with stable returns.
Difference Between Liquid Funds and Fixed Deposits
Although similar, liquid funds and fixed deposits have many differences. Listed below are the major differences between both:
Liquid Funds
- Liquid funds are short-term investments ranging from seven days to 91 days.
- It involves higher risk factors due to market volatility and the state of the economy.
- Liquid funds provide a higher but non-guaranteed return compared to fixed deposits.
- Liquid funds offer better liquidity at lower penalty charges for premature withdrawals.
- Returns from liquid funds if held over 3 years will be considered long-term capital gains and will be taxed at 20% after indexation. Otherwise, it will be taxed at slab rates.
Fixed Deposits
- Fixed deposits are long-term investments with tenures ranging from seven days to 10 years.
- Fixed deposits are considered low risk as they are offered by banks or NBFCs (Non- Banking Financial Companies)
- It provides a lower but fixed return compared to liquid funds.
- Fixed deposits offer liquidity, but there is a penalty for premature withdrawals of around 1% of the applicable interest.
- Interest returns from fixed deposits are taxed at slab rates as income from other sources.
Benefits of Liquid Funds
Choosing liquid funds as your investment form has many benefits. Primarily, this is a short-term investment type. This is a perfect choice for people looking for short-term investments that give a higher return. Though the return is not guaranteed, as it can be affected by the changes in the market, a liquid fund is still a good choice for those willing to take a risk. Most importantly, there are only low penalties for premature withdrawals, which makes this a convenient option.
Benefits of Fixed Deposits
Fixed deposits are a trusted form of investment. It is safe and provides a stable interest return. It offers long tenures of up to 10 years and is a great option for those looking for a stable and long-term investment. Risk factors are the lowest compared to any other form of investment, including liquid funds, and it also gives a better return than a regular savings account. Fixed deposits are a great choice for people looking for steady growth.
FAQs on Liquid Funds vs Fixed Deposits
- Which is the best investment option? Liquid funds or fixed deposits?
Both liquid funds and fixed deposits have their benefits and drawbacks. It is better to choose either of these according to your needs, funds, and willingness to take risks. If you want a risk-free long-term investment, it would be ideal to pick a fixed deposit. Otherwise, a liquid fund would be a good choice.
- Are liquid funds safe?
Yes, liquid funds are considered quite safe. As they lend to good companies for a very short term, the risks are lower.
- What are the risk factors involved in liquid funds?
The risk factors involved in liquid funds include inflation risk, credit risk, and interest rate risk. It also doesn't provide long-term growth.
- What are the cons of fixed deposits?
Major cons of fixed deposits are their lower returns, fixed interest rates, and penalties on premature withdrawals.
- Is there a minimum and maximum amount limit for fixed deposits?
Generally, the minimum amount one can deposit is Rs.1000 to Rs.10,000. However, it is subject to the bank's policies and may vary. As for the maximum, there is no limitation set.
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