If you have extra cash, it’s always better to invest it so the money can grow. A risk-averse individual would invest in bank fixed deposit (FD) which would give a decent return without any risk. But with the growing popularity of mutual fund, many of you invest in liquid mutual fund gives you a good amount of return than FDs which is not guaranteed due to a certain amount of market risk. Let’s explain both liquid fund and bank FDs briefly.
Liquid funds are a part of debt mutual funds. It invests in short term money instruments with a maturity up to 91 days. Liquid funds usually invest in money market instruments, treasury bills, very short term commercial paper, bonds etc. The entry and exit in the liquid fund are free, no entry or exit load is charged. Usually, liquid funds provide a higher return than bank FDs but these returns are not guaranteed though. You can keep your surplus money in the liquid fund and can withdraw it as per your convenience. The best performing liquid funds are offering returns around 8% to 10%.
Bank Fixed Deposits commonly known as FDs are the most common and widely used investment tool. It will offer return without any risk. The interest that you will earn on the money deposited in FD will be informed by the bank. Before you deposit the money, you need to select the duration of FD which extends from 7 days to 5 years. If you withdraw your deposit before the deposit tenure, you will have to pay some penalties. The bank will deduct TDS if the interest income is above Rs. 10,000 in a financial year. Presently, you can earn 7% to 9% return on FDs.
Comparing Liquid Fund Vs Fixed Deposits
Now let’s compare liquid fund and fixed deposits-
- Liquidity- Liquid funds are more liquid than FDs. If you want to withdraw money from the liquid fund, no extra amount is charged for that. But if you go for pre-mature withdrawals in FDs then you will be charged an extra amount.
- Returns- Liquid funds usually offer a higher return than FDs, though not guaranteed. FDs offer return with the pre-specified interest rate which will not vary throughout the investment period. But that is not the case in liquid funds. The amount of return depends on the market condition, so there is no fixed amount of return.
- Risk involved- Generally, there is no risk involved in FD investments. But liquid funds involves a certain risk factor which is related to the market fluctuations.
- Investment Option- When you are investing in FDs, you need to submit the total amount at one go. But in case of liquid funds, you can either invest a lump-sum amount or monthly investment option whichever is suitable for you.
- Tax Benefit– When you opt for bank FDs, the tax that is charged will be in according to your current tax slab. Whereas in the case of liquid funds if you invest for more than 3 years, your long term capital gain is taxed 20% with indexation.
- Management Fees– A certain amount of expense ratio up to 2.5% is charged for liquid fund management. Whereas no management fee is charged for bank fixed deposits.