In the current times of geopolitical tensions, rising inflation, and economic uncertainty, many individuals are asking the critical question: Where should I park my money in the short term – a short-term bank deposit or a liquid fund?
Gone are the days when interest on a savings account earned 4.00-6.00% per annum (p.a.). Currently, in the deregulated era (where both nationalised and private banks are free to set their own SB rates), a standard savings account typically offers 2.50-3.00-% p.a. interest. (Some do offer high rates, but those are above a threshold, making it meaningless for most investors).
This rate isn’t very efficient in the inflationary environment we’re living in – in fact, eroding the purchasing power of hard-earned money.
Also, historically, whenever the RBI has hiked the policy rates to control inflation, the major commercial banks (who can be trusted with your hard-earned money) have rarely raised savings account rates in tandem. An increase, though, is seen in bank fixed deposit (FD) rates.
But then, should you park your money for the short term – say, for 30 to 90 days – in a bank FD, or is there another option that may prove beneficial?
Let’s dive in to understand that…
Bank FD Interest Rate
You see, while banks advertise attractive interest rates, those are for longer tenures. For short-term, i.e. for 30 to 90 days, major commercial banks offer far lower rates.
Interest Rates p.a. Offered by Major Banks
| Tenure | SBI | HDFC Bank | ICICI Bank |
| 7 to 45 days | 3.05% | 3.25% | 2.75% |
| 46 to 90 days | 4.90% | 4.25% | 4.00% |
Senior citizens earn 50 basis points over the current rates
Data as of 3 June 2026
The table above shows that major banks are typically offering 2.75-4.90% p.a. on their short-term deposits.
In other words, if you park Rs 1 lakh in a term deposit of 30 days, you earn only around Rs 230–270.
If you consider this on an inflation-adjusted basis, the effect is further dampened.
Moreover, the interest earned from bank FD is taxable on an accrual basis, which further eats into the returns.
And if you need the money prematurely, before the 30-day or 90-day maturity, the bank may levy a penalty of 0.5-1.0%, which means you lose part of the interest you would have earned.
What’s the alternative then, you may ask.
Well, you could consider a liquid fund.
This is a debt mutual fund that invests your money in low-risk debt and money market securities with maturities of up to 91 days.
Typically, a liquid fund invests in Treasury bills (T-bills), call money, repurchase agreements, short-term government securities, certificates of deposits (CDs), commercial papers (CP), and term deposits.
Thus, there is a fair amount of diversification. A liquid fund carries low interest-rate risk and low credit risk. It is placed at the lower end of the risk-return spectrum.
The investment objective is capital preservation and ensuring liquidity through judicious investments in the money market and debt instruments.
The performance of a liquid fund is usually benchmarked against the Crisil Liquid Debt Index and/or Crisil 1-year T-bill Index.
How are the returns?
Liquid funds, on average, have delivered absolute returns of 0.5% and 1.68% over the last 1 month and 3 months, respectively, as of 3 June 2026.
Average Returns of Liquid Funds
| Absolute (%) | ||
| 1 Month | 3 Months | |
| Category Median of Liquid Funds | 0.50 | 1.68 |
Data as of 3 June 2026
These returns are higher than the effective interest on short-term bank FDs of 30-day and 90-day tenures of systemically important banks.
In other words, Rs 1 lakh parked in a liquid fund for 1 month would, on average, have earned Rs 500, and Rs 1,680 over 3 months (higher than in a short-term bank FD).
Moreover, if you choose a liquid fund wisely, the returns could be even better.
For example, Groww Liquid Fund (formerly Indiabulls Liquid Fund, launched in October 2011) is the top performer in 1-month returns, with a 0.52% return.
On 3-month absolute returns, Axis Liquid Funds tops the list with 1.71%.
Which are the top 3 liquid funds to consider?
Well, you could look at the following:
#1 Axis Liquid Fund
This fund was launched in October 2009 and has Assets Under Management (AUM) worth Rs 51,643 crore. Its expense ratio is 0.11% under the direct plan.
Axis Liquid Fund holds nearly 99% of its assets in AAA- and sovereign-rated debt papers and currently has 1% in cash & cash equivalents.
With such portfolio characteristics, the fund has maintained low interest-rate sensitivity, kept risk low and delivered above-average returns for its investors.
#2 Edelweiss Liquid Fund
This fund was launched in September 2007 and currently manages assets worth Rs 15,091 crore, at an expense ratio of 0.10% (under the direct plan).
A predominant portion (around 86%) of its assets is in AAA and sovereign-rated debt papers, and the fund currently holds around 14% in cash & cash equivalents.
With high credit quality and low interest-rate sensitivity, the Edelweiss Liquid Fund has exposed its investors to low risk and delivered attractive absolute returns: 0.50% in 1 month and 1.70% over 3 months.
#3 DSP Liquidity Fund
Launched in November 2005, this fund manages assets worth Rs 22,480 crore with an expense ratio of 0.12% (under the direct plan).
Again, this fund almost entirely invests in AAA and sovereign-rated debt papers and maintains low interest-rate sensitivity.
By exposing investors to low-to-moderate risk, DSP Liquidity Fund has delivered decent absolute returns of 1.49% over 1 month (closely tracking the category median) and 1.69% over 3 months (higher than the category median).
What about the tax impact on liquid fund investments?
As per the current tax rules, the capital gains on liquid funds – whether short-term (holding period of up to 24 months) or long-term (holding period of more than 24 months) – are taxed as per your income-tax slab, just as the case with short-term bank deposits.
However, there’s a difference. Capital gains are taxed on a realised basis, i.e., when you book a profit, and not on an accrual basis, as in the case of a bank FD.
Also, no penalty or exit load on the liquid fund beyond 7 days
As per regulatory guidelines, a liquid fund levies a graded exit load only up to 6 days from the date of investment. After a 7-day holding period, you are not charged an exit load.
This means even if you withdraw after 7 days and do not hold the investment for 30 or 90 days, the entire value of the investment can be redeemed without any load or penalty, unlike premature withdrawal from a short-term FD.
To Conclude
If you are willing to take some market-linked risk, a liquid fund is a better option than parking money in a short-term bank deposit.
Even if bank deposit rates rise somewhat in the near term as the RBI increases the repo rate (a general expectation for the second half of FY27) to curb inflation, banks usually take time to pass on higher rates to depositors. And by the time short-term deposit rates increase, inflation often rises as well, limiting any real benefit.
In contrast, in such a scenario, investing in a liquid fund may be appropriate for your short-term needs.
Investing in a liquid fund is not risk-free; there is some market risk, but it can be worthwhile when you consider the returns and, provided you choose the fund thoughtfully.
Investing sensibly and strategically.
Happy investing!
Note: We have relied on data from www.valueresearchonline.com, www.financialexpress.com, and the websites of systemically important banks throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.
Growth and Direct Plan for all existing open-ended liquid funds considered.
The returns data and bank FD interest rates are as of 3 June 2026. Portfolio data of liquid funds is as of 30 April 2026.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.
Rounaq Neroy has over 20 years of experience in the financial markets and investments. He is a close observer of the Indian economy and writes deeply on the capital markets, mutual funds, stocks, precious metals, asset allocation, wealth management, and investment strategy. His editorials provide interesting, actionable investment ideas to guide readers in the journey of wealth creation and make wise decisions. Rounaq was the Head of Content at PersonalFN (Quantum Information Services Pvt. Ltd.), which also owns Equitymaster.com – India’s oldest and trusted equity research house.
