Liquid Fund vs Fixed Deposit

19 May 2016 | 1757 Views | By Mint2Save

Liquid Mutual Funds have earlier been highlighted as a solution to plan spending with the Credit Card. In this article, we compare liquid mutual funds to fixed deposits and let you judge their pros and cons. This would not only enable you to decide on which investment you should bank upon, but would also clarify some of the common doubts that prevail when it comes to both the products.

Interest rates: Fixed deposits in India are marketed on fixed interest rates, though every bank can have different interest rate. This means that once the deposit has been made by you, the interest rate given at that particular time would prevail for as long as you stay invested in the deposit. This means that returns are fixed when one thinks of investing in a fixed deposit. However, looking at the current market scenario, the interest rates in a fixed deposit are not lucrative to pull young investors.

When it comes to liquid funds, we would replace the term “interest rates” by return. The return in liquid mutual funds is not fixed. As of now, it keeps on juggling between 8-9.15%. The reason for return not being fixed is owed to diverse money market instruments in which liquid mutual funds invest.

2.Maturity: Investment in fixed deposits means locking in your funds for a definite amount of time. However, you can extract out the funds before the fixed deposits mature but then your returns would be hampered by penalty that the bank would levy. Hence, it fixed deposits are designed to be a fixed time interval deposit. Quite a number of banks do vary their interest rate depending upon the time your funds are parked with them in form of a fixed deposit.

Coming to liquid funds, there is no definite time period of investment. You can stay invested for a week, a fortnight, a year or as long as you want to be. While this eases the access to money when needed, this can reduce the saving tendency if you get too frequent in taking out your savings from the liquid funds. Some fund houses do offer Fixed Maturity Plans (FMPs), which can serve as an alternate solution when it comes to parking money for a fixed period of time.

3. Taxation: Keeping it short and simple to taxes, Interest earned on Fixed Deposits are taxable while that in liquid mutual funds are not taxable. This does not mean that the fund is tax free. All the liabilities like tax are addressed by the fund house from their end, thus, making it simpler for the investor.

4.Product Types: Fixed Deposits can be categorized into various time buckets that they are put into. These time buckets can range from 7 days to 10 years. On the other hand, liquid funds do not have types. There can be dividend or growth option, which can be marketed as different terms such as fixed income plan, regular income plan etc.

5.Risk: One of the prime criteria that define any investment is “Risk”. Irrespective of someone’s knowledge quotient, risky affairs are usually averted by anyone seeking a good return on his investment. Thanks to vigilant RBI, deposits with the bank are one of the safest in all over the world. This is why we have seen a lot of people investing in fixed deposits.

Well, thanks again to the RBI and its policies that investments in debt instruments which Liquid Funds seek are regular and are placed in lowest risk category of mutual fund investments.

These five factors are just a few of the several basic know-how that one should keep in mind while choosing an investment. We would soon explore more differences between these two and clarify the picture.