Liquid Funds vs Fixed Deposits: A Comparative Guide

byPriyanka JuyalLast Updated: April 18, 2024
Liquid Funds vs Fixed Deposits

Fixed deposits and liquid funds are different investment options. It’s important to understand the differences between the two before making an investment decision. Some key differences include the features, benefits, limitations, market risks, and other factors associated with each option. Understanding these differences can help investors make informed decisions about their investments.

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

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

What are Liquid Funds?

One of the many types of mutual funds are liquid funds. These funds are invested in short-term interest-bearing money market instruments such as high-yielding corporate and government bonds, treasury bills, commercial papers, and so on. In most cases, liquid funds mature in 91 days.

  • Liquid funds tend to offer safety in the form of capital preservation
  • These funds invest in highly-rated money market instruments
  • They are considered a little safer investment option than other types of mutual funds
  • The investor can redeem the funds at any time, and the funds will be deposited into his or her 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 providing better returns to investors than savings and current accounts
  • They are less volatile because 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 can be redeemed in a single day
  • They are unaffected by interest rate fluctuations
  • These funds are managed by professionals
  • Liquid funds require a minimum amount of Rs 500 to invest
  • They offer both growth and dividend options
  • Liquid funds have a 7-day lock-in period, unlike regular fixed deposits where premature withdrawal attracts a penalty that must be paid

Who is Eligible to Invest in Liquid Funds?

Following are eligible to invest in liquid funds:

  • These funds are appropriate for investors with substantial cash
  • For those looking to invest in short-term investment instruments
  • It can be used as a medium to invest in equity funds
  • 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:

  1. Liquid funds, one of the various types of mutual funds, are unaffected by market conditions 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
  2. A fee has to be paid by the investor to manage liquid funds
  3. Investors, with the aim of creating emergency funds can find liquid funds the ideal option to invest in. These funds provide higher returns while also allowing the investor to redeem the funds at any time
  4. 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 as ‘term deposits’ or ‘time deposits.’ They are among the most secure investment instrument services provided by non-banking financial companies (NBFCs) and banks. FDs allow investors to deposit a lump sum amount for a predetermined period of time. In addition, FD provides users with a plethora of other features such as-

  • Depositors can earn interest on their deposits for a set period of time.
  • Once created, the interest rate is unaffected by changes in the market or interest rates.
  • A fixed deposit amount cannot be withdrawn before the maturity date, and if a depositor wishes to do so, he or she must pay a penalty.
  • Depositors can earn interest either on a regular basis or at the maturity of their FD.
  • FD tenure can range from 7 days to 10 years or 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 the safest investment option when compared to other types of savings investments.
  • The interest rate on the fixed deposit account remains unchanged even after market fluctuations, that too, throughout the decided tenure
  • When a fixed deposit account matures, customers can either direct banks to credit the amount or reinvest the amount for another predetermined tenure.
  • FDs provide a guaranteed 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 use the FD calculator on the respective bank’s website to calculate the interest they will receive on the deposited amount.
  • 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 wishes to continue saving money while avoiding market risk
  • A user who works as a housekeeper and has a good income
  • If you have taxable income, an FD can be a tax-saving investment instrument
  • A retired person looking for 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:

  1. Compare the various types of fixed deposits provided by various banks.
  2. The type of fixed deposit that best meets your needs
  3. The lender’s credibility as determined by the ICRA and CRISIL ratings
  4. The selected bank’s customer service
  5. If the bank provides FD-related flexibility
  6. If a large number of documents must be submitted, or if only KYC documentation is required

Also Read: How to Open a Fixed Deposit Account Online?


Can a salaried professional invest in liquid funds?

Yes, salaried professionals can invest in liquid funds. Liquid funds are suitable for investors who want to invest in short-term instruments or build emergency funds.

What is the maturity period of liquid funds?

Liquid funds have a maturity period of 91 days.

When does the amount of a fixed deposit mature?

The maturity of a fixed deposit depends on the chosen tenure at the beginning. Banks generally offer FD tenures ranging from 7 days to 10 years or more.

Is it possible to open a fixed deposit online?

Yes, banks make it easy for users to open fixed deposits online by following a few simple steps.

What are liquid funds and how do they compare to fixed deposits in terms of liquidity?

Liquid funds are a type of mutual fund that invests in short-term debt instruments to provide quick access to investors' money. They are generally more liquid than fixed deposits, but may have redemption restrictions.

What are the advantages and disadvantages of investing in liquid funds vs fixed deposits?

Liquid funds offer higher returns and flexibility, but are subject to market risk. Fixed deposits are more stable, but offer lower returns and less flexibility. An investor's decision depends on their circumstances and goals.

How do the returns on liquid funds compare to those on fixed deposits?

Liquid funds may offer higher returns than fixed deposits, particularly in a low-interest rate environment. However, the returns on liquid funds are not guaranteed and can fluctuate.

How do the risks associated with liquid funds compare to those associated with fixed deposits?

Liquid funds are subject to market risks, while fixed deposits are low-risk with guaranteed returns.

How do the fees and charges associated with liquid funds compare to those associated with fixed deposits?

Liquid funds typically have lower fees and charges than fixed deposits due to professional management and lower operating expenses.

What factors should an investor consider when deciding between investing in liquid funds vs fixed deposits?

Investors should consider potential returns, risk, fees and charges, liquidity, financial goals and time horizon, and the stability and reputation of the financial institution when deciding between liquid funds and fixed deposits.

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