FDs vs Liquid Funds: How To Choose The Right Investment
Before going any further it is important to understand both these options. A fixed deposit is a sum of money that is invested for a particular tenor and offering a fixed rate of interest, thereby giving investors a fixed return that is not affected by the market. It is one of the most reliable and safe investments possible—whether you choose a bank FD or a company/corporate FD.
Liquid funds are debt mutual funds that involve investing funds in government securities, corporate bonds and other debt or fixed income securities for a short-term. Usually this kind of investment carries a fixed maturity date and a fixed interest, which makes them safer than others. These funds provide interest that is a fraction higher as compared to FDs. They are incredibly short in term and quite low on risk.
Both fixed deposits and liquid funds have their own features while they provide similar benefits; however it is important for you to consider certain factors before choosing one against the other. In a nutshell, while liquid funds offer greater short-term returns, fixed deposits offer immense value and growth to savings over a comparatively longer period of time.
How to make the prudent choice
- Your objective of investment: Before going ahead with any decision, do consider the objective of your investment. There can be numerous objectives like retirement, purchasing a vehicle or an asset, planning for a family holiday and more. Retirement often requires long-term planning and the need for steady interest payments not dependant on markets whims and thus fixed deposits are best for this. However if your goal is to purchase an asset like a high-end laptop within a few months, you could opt for liquid funds.
- Short term or long term finance: Investors are usually divided amongst those who seek instant returns and those who seek long term returns. While short term returns are highly liquid and provide the instant availability of cash, long term investments like FD grow over time and provide more value over your invested amount.
- Taxation on returns: Most investment options require you to pay a certain amount of tax on returns. For fixed deposits, tax has to be paid annually, whereas on liquid funds, you only have to pay tax while liquidating the amount. The post-tax earnings on fixed deposits are around 4.55% whereas the earnings on liquid funds are from 8-9%. Hence if you seek to have higher returns after tax, liquid funds are your best bet.
- Value of investment: This is a factor that any investor is likely to consider before making a decision. Fixed deposits are long term and offer excellent value and growth for your investment over time. Liquid funds are relatively short term and provide high returns on an immediate basis. If you seek your investment to mature and grow over a long period, fixed deposits are ideal for you. However those looking at short term risk-free gains can benefit from liquid funds.
Gains that can be made from fixed deposits
- FDs provide you the ability to make the most of your savings in a secure and safe way
- They offer attractive rates of interests, especially when you choose company FDs
- They force you to invest and not access your savings until the date of maturity
- The money in an FD account can however be withdrawn in case of emergencies but you will be charged a penalty for premature withdrawal
- They are the ideal investment option for retiring individuals
- They can provide good returns up to the tenor of 5 years without any change in interest
Gains that can be made from liquid funds
- They provide short term gains and are ideal for durations of up to 1 year
- They provide higher rates of return as compared to FDs
- They deliver higher post tax deduction margin of return; however, these funds do not offer much growth to the investment
- They are more risky than FDs since they depend on market fluctuations
- They provide more liquidity than FDs
A thorough look at both liquid funds and FDs shows you the pros and cons of each option. A wise investor will take all the information into account before creating an investment plan that includes both options for best returns, keeping both safety and returns in mind.
For FDs with attractive interest and debt mutual funds that offer good stability look no further than Bajaj Finance.