When it comes to fixed-income investments, there’s a wide range of options to choose from, with fixed deposits and liquid funds, standing out among them. For anyone aiming to grow their wealth with stability in their portfolio, understanding these options is a great starting point.
What Is a Fixed Deposit?
Fixed deposits have been a traditional favourite for years. They’re like the cosy blanket of the investment world: familiar, comforting, and straightforward. You put in a sum of money, lock it away for a set period, and at the end, you receive your initial capital plus interest. The predictability and safety are what draw investors to them.
This reliability is especially appealing in times of financial uncertainty, providing a secure harbor where your savings not only remain safe but also grow at a steady rate.
The interest from fixed deposits is fully taxable according to your tax bracket, which can significantly reduce your net returns.
Whether saving for a near-term goal or simply putting aside money for the future, fixed deposits offer a straightforward path to achieving financial objectives without the market volatility of equity instruments.
What are Liquid Funds?
On the other hand, liquid funds are a category of debt mutual funds that predominantly invest in fixed-income instruments. These include treasury bills, corporate bonds, government securities, and other debt and money market instruments, catering to short-term investment strategies.
Liquid funds often offer better returns than fixed deposits, though they have a slightly higher risk factor. Liquid funds also benefit from indexation when held for more than three years, leading to potentially lower taxes on gains due to inflation adjustments.
FD vs Liquid Mutual Fund – Which One is a Better Choice?
| Feature | Fixed Deposit | Liquid Mutual Fund |
| Safety | ✓ | ✓ |
| Predictable Returns | ✓ | ✗ |
| Potential for Higher Returns | ✗ | ✓ |
| Liquidity | ✗ | ✓ |
| Interest Rate Risk | ✗ | ✓ |
| Tax Efficiency | ✗ | ✓ |
| Investment Flexibility | ✗ | ✓ |
But why would someone choose liquid funds over fixed deposits? Here lies the story of flexibility and potential returns.
Fixed deposits offer safety and predictability with guaranteed returns and bank security, ideal for risk-averse investors. Liquid funds, on the other hand, promise higher returns based on market performance, with the added advantages of quick access to funds, sensitivity to interest rate changes, tax benefits through indexation, and the flexibility to invest or withdraw at any time.
This makes liquid funds a more dynamic option compared to the stable nature of fixed deposits.
Conclusion
So, which one is better? The answer lies in understanding your financial goals, risk tolerance, and liquidity needs. If you’re someone who values safety and predictability above all, fixed deposits can be your go-to option. However, if you’re looking to potentially increase your returns while having the flexibility to access your funds, liquid mutual funds could offer the edge you’re looking for.
To start your investing journey and create a balanced portfolio, you can consider opening an account with Dhan, India’s one of the leading online investment and trading platforms.