Investments in any kind of business do not guarantee you profit rather it can prove a wrong decision and you may lose your money. You cannot be sure that a particular business may give you profit at the very beginning. Incurring loss may also prove fatal to the person who has invested the money he has saved his entire lifetime. To save your money with fixed deposits it is a better way to invest securely and get better gains. As the level of risk involved is low, you can be fearless about your investment.
These are the things you need to keep in mind while investing in FD
- You cannot withdraw your money before the maturity of your FD.
- If you opt to withdraw your money before the maturity period you may be fined by the bank.
- Banks may provide you a loan but the interest rate may be higher than the interest rate on the FD.
There is another way you can invest safely without worrying about the maturity tenure. You can invest in liquid funds for a better return.
What is liquid fund?
Liquid funds are mutual fund investments where you can invest your money in debt instruments like FD’s, treasury bills, commercial papers. As these debt instruments have lower maturity tenure, a debt manager can sell them easily and immediately.
Features of Liquid funds
- The liquid funds have a low lock in periods so you can easily sell your funds and get cash instantly.
- You can redeem your funds in 1 working day.
- If you sell them before 2 pm you get the money by evening. But if you sell them after 2 pm you will get the money the next day in the morning.
- You are not charged entry and exit charges.
- The interest rate is higher than the FD’s. The interest rate ranges from 4 percent to 8 percent per annum.
- You can invest in direct plans as it has low charges and higher returns.
Which one are better Fixed Deposits or Liquid Funds?
The mutual fund companies pay 28.325 percent tax on dividends before giving them to the investors. So the money that the investors get is tax-free. If you have invested in growth plans and you plan to sell them before 1 year, and you have any tax returns to your income, you will have to pay income tax.
The liquid funds have a shorter period of securities and 4 percent to 8 percent returns are offered to the investor. While the bank offers 4 percent to 9 percent interest based on the tenure of the fixed deposit, you will get a low rate of interest if you have applied for the lower tenure of fixed deposit. To understand the benefits of FD you need to know the returns they provide.
- If you are planning to invest for 3 months, on fixed deposits you will get returns from the banks at the rate of 1.5 percent, as the liquid fund will provide 2 percent.
- If you are planning to invest for 6 months, on fixed deposits you will get returns from the banks at the rate of 3 percent and the liquid fund will offer 4 percent.
- If you invest for 6 months, 3 percent of interest rate will be provided by the bank on fixed deposits whereas you will get 4 percent on liquid funds.
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So if you are planning to invest for a period shorter than 6 months, liquid funds might prove beneficial as they provide higher rate of interest but if you plan for more than 6 months the interest rate will be similar to 6 months but the banks may provide you increased rate of interest due to the longer tenure.