For a short-term, you can prefer liquid funds over fixed deposit to fetch more return. But in long-term, the return remains pretty much the same.
Fixed Deposits or Liquid Mutual Funds
When it comes to park your hard-earned money, you contemplate long and hard on the pros and cons of the investment options available for you. It is always a tendency on our part to opt for the safer route by parking the fund in savings bank account. However, the downside is reduced interest income as savings rate is only 4% across majority of the banks in India, with a very few offering 6%-7%. So, the focus shifts to mutual funds and fixed deposits. Mutual funds are broadly classified into various types-equity, debt, hybrid and liquid funds. Of these, liquid funds are the ones that could grab your attention with their increasing liquidity, i.e. the potential to convert into liquid form such as cash. Fixed deposit, on the other hand, is low in liquidity. So, which is better- Fixed Deposit or Liquid Mutual Funds? It will be decided by understanding both products in detail. Only then, you can draw the comparisons between them to pick the right product that will meet your investment objective and risk appetite. So, without any delay, let’s get on with these products.
Fixed deposit, a financial instrument offered by banks and non-banking finance companies (NBFCs), provides investors with an opportunity for higher interest rates compared to savings bank account. However, fixed deposit from NBFCs is unsecured in nature. So, it is better to choose FD from a bank. With FD, you have to park a fixed sum of money and wait till the maturity to receive the proceeds, a sum of interest and principal amount. The minimum amount for FD across most of the banks is Rs 1,000. However, there is no cap on the maximum amount. The interest rate on FD ranges from 4%-8% per annum for a period of 7 days-10 years across banks in India. The fixed deposit rate is dependent on the changes brought in policy rates by the Reserve Bank of India (RBI). However, banks can either revise or not revise the FD rates.
Liquid Mutual Fund
Liquid funds are a part of mutual funds that invest mainly in money market instruments, such as commercial papers, treasury bills, certificate of deposits and term deposits, with a maturity period of upto 91 days. Liquid funds come with a host of features, which you can see below.
Features of Liquid Fund
- It comes with a zero lock-in period
- Returns fall in the range of 4%-8% per annum
- You can redeem the funds within one working day
- If you want to get the proceeds on the day of redemption, you would have to sell the units before the stipulated time in the day. Else, the proceeds will come the following working day.
- No entry and exit loads
- Low interest rate risk due to investment in short-term debt instruments
- It comes with several plans like dividend plan, growth plan, daily dividend plan, weekly dividend plan, monthly dividend plan, quarterly dividend plan
- You can also invest in direct plans to lower the expense ratio
These were all about fixed deposit and liquid fund in general. Let us now draw parallel between them to help you select from these investment options.
For a short-term, you can prefer liquid funds over fixed deposit to fetch more return. But in long-term, the return remains pretty much the same. Taking into consideration the factors stated above, you can take a call on choosing from fixed deposits and liquid mutual funds. But bear in mind your investment objective and risk appetite should dictate your choice.
The author is Founder, Deal4Loans.