Differences to remember while investing in fixed deposits and Liquid funds
- January 20, 2023
Investments in any 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 better 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 the 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 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 is 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 plan to sell them before 1 year and 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 fixed deposit tenure, 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 plan 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 plan 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, a 3 percent 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 a higher interest rate. Still, if you plan for more than 6 months, the interest rate will be similar to 6 months, but the banks may increase interest rates due to longer tenure.