Liquid Funds vs FD- Why Liquid Funds are Better than Fixed Deposits?

• Risk:

  Fixed deposits have existed in the financial market for a long time because they are risk proof. However, in the case of liquid funds, there is a moderate risk as the fund’s performance is subject to market risks, changing interest rates, etc. Liquid fund’s NAV depends on these factors; hence, opting for this type of fund can be a slight risky. Keeping the risk factor aside, you should also note that NAV of liquid funds does not fluctuate frequently.

• Returns:

  The interest rate on the FD account is mostly in the range of 6% to 7% for general citizens and senior citizens the maximum rate is 8.05%. The rates can go up to 9%, and it usually depends on market trends. Your money will grow at a fixed interest rate throughout the tenure. Hence, it is not the best choice if you are looking for maximum returns.

  Liquid Funds generate profits at the interest rate ranging from 7% to 9%. This is better as compared to the FDs. Till now, most funds have delivered positive returns on redemption.

• Liquidity:

  In case of emergency, you cannot withdraw money from FD before its maturity; you will lose the benefits. The bank can also impose a liquidation fee. This is same even in case of partial withdrawal of funds. It attracts 1% of penalty if you redeem it before the maturity date.

  Liquid funds prove to be useful in an emergency. You can withdraw money anytime during its short investment horizon.

• Investment Horizon:

  The tenure of FD accounts ranges from 7 days to 10 years. You can choose the investment period depending on your needs and the minimum deposit amount should Rs.1000.

  Liquid Funds have a short maturity period, which is up to 91 days. You can start investing a minimum of Rs.1000 or a maximum of Rs. 5,000 monthly.

• Taxation:

  You’re entitled to get tax deductions under Section 80C of the Income Tax Act; however, the returns you earn through FD is taxable. For FD accounts, if returns exceeds Rs. 10,000 per annum, the bank will levy TDS at the rate of 10%. In order to avail the tax-saving benefit, you must invest in FD with a maturity period of 5 years.

  When it comes to tax on liquid funds, the long-term capital gains are applicable for tax at an interest rate of 20%, while the short term capital gains fall under the individual tax slab category. The tax-saving benefit makes it the best alternative to Fixed Deposits.

It’s best to opt for Liquid Funds

All the above factors prove why you should choose liquid funds over FDs. Keeping aside the market risk factor, liquid mutual funds is definitely best as compared to FDs. It is a safe and secure option for investing your surplus cash for wealth accumulation or creating an emergency fund in a short time.