Liquid Funds vs Fixed Deposits: A Comparative Guide

Liquid Funds vs Fixed Deposits

Both liquid funds and fixed deposits are different from each other. They are different in terms of features, advantages, limitations, market risks and more. It is always advised to understand the difference between liquid funds vs FD before investing or choosing one for investment.

In this blog, we will understand the difference between liquid funds vs FD and more about them.

What are Liquid Funds?

Liquid funds are one of the various types of mutual funds. These funds are invested in short term interest reaping money market instruments like high rate corporate, government bonds, treasury bills, commercial papers, etc. The liquid funds generally mature within the time duration of 91 days.

  • Liquid funds tend to offer safety in the form of capital preservation
  • Such funds are invested in high rated money market instruments
  • They are considered a little safer investment option as compared to other classes of mutual funds
  • The investor can redeem the amount anytime and the money will be reflected in the bank account within 24 hours

What are the Benefits of Liquid Funds?

Listed below are a few of the benefits of liquid funds-

  • Liquid funds are considered good in terms of offering better returns to the investors as compared to a savings account and current account
  • They are less volatile as they are invested in high credit rating instruments
  • Liquid funds do not have exit loads
  • Liquid mutual funds mature in 91 days
  • Such funds are liquid in nature and their redemption can be processed in 1 day
  • They are not impacted by interest rate fluctuations
  • These funds are managed by professionals
  • Liquid funds require a minimum amount of Rs 500 to invest
  • They come with growth and dividend options
  • Liquid funds have a lock-in period of 7 days unlike regular fixed deposits where premature withdrawal attracts a penalty to be paid

Who is Eligible to Invest in Liquid Funds?

Following are eligible to invest in liquid funds-

  • These funds are suitable for investors with substantial cash
  • For people who are seeking to invest in short term investment instruments
  • One can use it as a medium to invest in equity funds
  • An investor who is looking to invest in short term financial instruments
  • Anyone who would want to invest an amount as an emergency fund
  • Someone who wants to invest the amount without the lock-in period barrier

What Should be Taken Care of When Investing in Liquid Funds?

A few things should be taken into consideration about liquid funds before investing in them-

  • Mutual funds are impacted by the market conditions; however, liquid funds, one of the various types of mutual funds, are not much impacted by the market as they get matured within 91 days. Still, it is advised to ensure that the Net Asset Value (NAV) is not affected by the fluctuations in net asset value
  • A fee has to be paid by the investor to manage liquid funds
  • Investors with the aim of creating emergency funds can find liquid funds the ideal option to invest in. These funds generate higher returns along with letting the investor redeem the funds anytime
  • Before investing in liquid funds, it is advised to connect with experts and know how much interest is generated by such funds

What is a Fixed Deposit?

Fixed deposits are also known by the terms like ‘term deposits’ or ‘time deposits’. They are one of the safest investment instrument services offered by non-banking financial companies (NBFC) and banks. FDs allow investors to deposit a lump sum amount for a pre-decided tenure. In addition to this, FD provides the users with a lot of other features such as-

  • Depositors can earn interest on the deposited amount for the pre-decided tenure
  • The rate of interest once locked remains unaffected by any changes in market or interest rates
  • A fixed deposit amount cannot be pulled before the maturity date and if in case, a depositor wants to withdraw the amount, he/she is liable to pay a penalty for it
  • Depositors can earn interest either periodically or at the time of FD maturity
  • The tenure for FD ranges from 7 days to 10 years and more (might vary from one bank to another)

What are the Benefits of Fixed Deposit?

The benefits of fixed deposits are numerous, a few among them are listed below-

  • Fixed deposits are considered to be the safest investment option as compared to other saving investments options
  • Interest offered on the fixed deposit account remains unaffected even after fluctuations in the market, that too, throughout the decided tenure
  • Upon the maturity of a fixed deposit account, customers can either direct banks to credit the amount or reinvest the amount for another pre-decided tenure
  • FDs offers an assured rate of interest
  • There are several banks that offer tenure from 7 days to 10 years
  • Several banks offer fixed deposits with tax-saving benefits
  • Customers can check the interest they will receive on the deposited amount by using the FD calculator available on the respective bank’s website
  • Customers can reinvest the matured FD amount again for the decided tenure, on which, compound interest will be provided to him/her
  • Banks offer flexibility to their customers to choose the tenure for fixed deposits

Who is Eligible to Open a Fixed Deposit Account?

Following are eligible to open a fixed deposit account

  • A person who would want to keep saving the money without taking the market risk
  • A user who is a housekeeper and has decent money
  • If someone has taxable income, FD can be a tax saving investment instrument
  • A retired person who would like to have a regular source of income

What should be taken care of when Investing in Fixed Deposits?

The right way to choose fixed deposits is to go through the following factors-

  • Compare all the types of fixed deposits offered by different banks
  • The type of fixed deposit that matches your requirements
  • The lender’s credibility through the ICRA, CRISIL ratings
  • Customer service offered by the chosen bank
  • If there is FD related flexibility given by the bank
  • If it is required to submit a lot of documents or if KYC documentation is only required (like in the case of Paytm Payments Bank fixed deposit process)

What is the Difference between Liquid funds vs FD or Fixed deposit?

ParticularsFixed DepositsLiquid Funds
RiskLow riskHigher risk (compared to fixed deposits)
ReturnsFixed-rate of interestNo guaranteed returns
Tends to offer better returns as compared to fixed deposits
LiquidityFixed deposits have a maturity period from 7 days to 10 years (varies from bank to bank)Premature withdrawal attracts a penaltyExit load levied on funds that are redeemed within 7 days of holding them
From the 7th day onwards, there is no exit load on the redemption
Offer better liquidity
Tenure7 days to 10 years7 days to 91 days
Suitable forShort term and long term investorsLong term investors
Minimum investmentHighLow
Can a salaried professional invest in liquid funds?
Investors who would want to invest in short term investment instruments can invest in liquid funds. Apart from that, anyone who would want to build emergency funds can try investing in liquid funds.
What is the maturity period of liquid funds?
The maturity period of liquid funds is 91 days.
When does the amount of the fixed deposit matures?
The maturity of fixed deposits depends upon what an investor has chosen as a tenure in the beginning. Generally, banks offer investors the ease to open FDs for 7 days to 10 years or more.
Can I open FD online?
Yes, banks and Paytm Payments Bank offers users the ease to open FD online by following a few easy steps.
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