Liquid funds vs fixed deposit-a comparative guide

Know all the details about how investment in liquid funds is different from investing in fixed deposit.
3 mins
12 Oct 2022

For a long time, fixed deposit and the recurring deposit have ruled the investment domain. It was until the past decade that other investment options like mutual funds, stocks, etc., gained popularity. Primarily, it was due to the risk-free nature and steady returns of former investment options. Let us look at the following insights to explore more such investment options.

1. What are liquid funds?
Liquid funds are debt mutual funds that invest in fixed income assets like treasury bills, high rated government/corporate bonds, commercial papers, etc. Liquid funds invest in the fixed income instruments where these funds mature in 91 days. The main aim here is to protect your funds while simultaneously providing liquidity to your funds. Hence, liquid funds usually invest in high-rated market instruments. These funds are capable of offering better interest rates when compared to FD.

Due to these factors, you can consider liquid funds as the most secure of all the mutual funds classes. Despite these perks, liquid funds are still volatile to market fluctuations, interest rate changes, etc.
More on Mutual Funds

2. How are liquid funds different from FD?
Before comparing liquid funds with a fixed deposit (FD), let us understand what an FD is. A fixed deposit is a tool that allows you to invest a lump sum amount for a specific period. Here, your fund is not invested in market instruments. As a result, it offers high security on your deposits. A fixed deposit is tax-free if the income is less than:

a) Rs. 40,000 per year for regular citizens and
b) Rs. 50,000 for senior citizens.

Institutions like Bajaj Finance provide an FD with an option to earn two schemes, cumulative and non-cumulative. Cumulative FD allows you to invest a lump sum amount over a specific period, and you earn a payout (principal+interest) post maturity (tenure end). At the same time, non-cumulative FD allows you to earn regular payouts monthly, quarterly, half-yearly, or yearly.

Liquid funds offer comparatively higher returns and lower penalties on premature withdrawal of your investments. Along with these perks, they involve higher risk than FD, and taxes on long-term capital gains are comparatively higher. In liquid funds, tax is payable at 20% if you invest for more than three years and as per the regular tax slab for short-term capital gains. The tax payable in the case of an FD is 10%.
More on FD

3. Diversify your portfolio with FD and liquid funds.
Diversification is the most crucial factor when it comes to investment and it is not ideal to keep all your investments in one bucket. If the bucket leaks, all your money drains out in one go. Choosing more than one option to invest always helps to grow your investments as one’s advantage can compensate for the other’s disadvantages.

In this case, you can use the benefits of liquid funds and FD to build a good investment portfolio. Select non-cumulative payout by Bajaj Finance FD to earn monthly interest and re-invest it in liquid funds to earn higher returns. Investing in this manner helps you enjoy the security of an FD and higher returns of liquid funds at the same time.

Calculate FD returns through our FD calculator