A Comparative Analysis of Liquid Funds and Fixed Deposits

A Comparative Analysis of Liquid Funds and Fixed Deposits

Fixed deposits in India are one of the oldest forms of investing and they are also the most trusted. Fixed deposits were the best option for saving money and earning interest before mutual funds and shares became popular as investment options. Fixed deposits offer many benefits, including low risk, reasonable returns, and high liquidity. As mutual fund investors began to explore different types of investments, many debt and equity funds were created over the years. Liquid funds are similar to FDs in terms of risk and investors often compare them with fixed deposit options when deciding between them. To help you make the right decision, today we will present a comparison of FDs & Liquid Funds.

The Fixed Deposits and Liquid Funds 

Sometimes, you may have funds that are not being used for a while. Let's suppose you have the funds to travel internationally in December, and that you managed to get them in January. You won't use the funds until December so it would be a good idea to keep them in savings. You can invest these funds until December in instruments that yield higher returns than savings accounts but don't compromise the safety of principal.

In such situations, a fixed deposit is the first thing that comes to mind. Fixed deposits are an investment instrument that provides a fixed interest rate over a specified tenure. This is offered by banks as well as non-banking financial institutions (NBFCs). It is more than a savings account.

A liquid mutual fund is another option for short-term investments. This type is used to invest in fixed income instruments like commercial paper, government securities, and treasury bills. With the maturity of up 91 days. The fund manager aims to provide better returns than savings account interest and capital protection to investors.

Detailed Comparison between Fixed Deposits & Liquid Funds

These are some comparisons between liquid and fixed funds.

FeatureFixed DepositsLiquid Mutual Funds
RisquesThese are low-risk investments because they are offered by banks and NBFCs. They usually include an insurance policy that protects the invested capital as well as interest, up to Rs.15,000 per bank.Liquid mutual funds invest only in fixed-income instruments. These instruments are subject to market volatility and the overall economy. Fixed deposits are less risky than these funds.
ReturnsFixed deposits provide a fixed rate of interest that is determined by the Reserve Bank of India according to the economic and financial conditions in India. Although the returns are higher for savings accounts than liquid funds, they are still lower than liquid funds.The guaranteed returns offered by liquid mutual funds are not guaranteed. They do offer higher returns than fixed deposit funds. You need to make sure that the fund manager doesn't take too many risks when managing the portfolio. Before investing, you should carefully read the offer document.
LiquidityFixed deposits are subject to maturity date. The rate of interest offered on fixed deposits is determined by the tenure and principal amount of the deposit. You can withdraw funds from your account at any time, but a penalty (usually one percent) will be imposed. Fixed deposits are liquid, but they come with a cost.Although liquid fund units can be redeemed at any time, there are exit loads. Last year, the Securities and Exchange Board of India announced exit loads for liquid assets that must be redeemed within seven business days. This is a structured structure. A liquid fund can be held for one day, then it can be exited at an exit charge of 0.007%. It will hold for three days - 0.065%, four days- 0.0065%, five days- 0.0055%, six days- 0.0045%. There is no exit charge on redemptions after the seventh day. Liquid funds provide better liquidity and are subject to lower penalties than fixed deposits.
Horizon InvestmentFixed deposits can be invested for seven days up to ten years.Liquid funds can mature for up to 91 days.
TaxationFixed deposit interest is added to your annual income, and taxed according to the applicable tax bracket. The bank/NBFC also deducts 10% TDS whenever interest is earned or paid out. You must deduct the TDS amount and pay the difference at the end of each year. A tax-saving fixed deposit can be arranged with a lock-in period of three years. This will allow you to claim tax deductions up to Rs.1.5 million under Section 80C, Income Tax Act 1961.Your returns from liquid fund investments that are held for longer than three years will be treated as long-term capital gain and subject to 20% tax after indexation. For investments that are held for less than three years, your returns will be subject to the applicable income tax slab.

How do you choose between them?

Both liquid and fixed deposit have their pros and cons, as you can see. How do you decide between them? These are some tips to help you choose.

Who should invest in a fixed deposit?

Fixed deposits are great for investors who have a low tolerance to risk. It is important to note that although fixed deposits are regulated by banks, you must check the CRISIL ratings of NBFCs before you invest. This is a great long-term investment option for those who want to achieve higher returns than savings accounts, and have a low tolerance of risk.

Who should invest in liquid funds?

Liquid funds invest only in fixed-income instruments and are able to provide capital protection and liquidity for investors. They only invest in high-quality instruments. They are therefore safer than mutual funds. They are however more risky than fixed deposits.

If you are able to tolerate low levels of risk and want higher returns than a fixed deposit, liquid funds may be a good option. These funds are not guaranteed to provide any returns but they offer higher returns than FDs.


You can see that liquid and fixed funds are both great investments for low-risk investors. However, there are unique characteristics that make them suitable for different types. Before you decide between the two, consider your financial goals, investment time frame, and risk tolerance. These factors will allow you to choose the best option for your investment journey at any point.

Best Wishes For Investing and good luck for the Future!

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