FD Vs Liquid Funds : Which Investment Should You Choose ?

Lets try to understand the difference between the most common debt based investment options for parking money over short term and long term.

When it comes to investing, your goal should always be to grow and protect your wealth. A conservative investor looking out for a safe harbour to protect his wealth can consider FDs and Liquid Funds. Before the advent of mutual funds in India, FDs ( fixed deposits) were quite popular among Indians as a safe and steady return instrument. Later the Liquid mutual funds emerged, which are also known as liquid funds have almost similar features as FDs but serve different purposes. Both of them generate comparable returns (one can expect returns between 5% to 7.5%) but may not be suitable for everyone. In this article we will dive deeper and explore the differences between FDs and Liquid Funds. Additionally, we will compare their features, risk and suitability.

What is Fixed Deposit (FD) ?

FDs are long term preferred saving schemes offered by Indian banks or other financial institutions, where you deposit a lump sum amount for a fixed tenure on which you receive a predetermined interest rate on maturity. FDs are widely popular in India among conservative investors due to their guaranteed return . Currently, most Indian banks offer an interest rate ranging between 6.5% and 7.5% per annum.

Key Features of FDs :

Low Risk : Fixed deposits are not influenced by market fluctuations. Hence it’s very suitable for investors who don’t want to take any risk.
Return is fixed : The return on fixed deposits is almost guaranteed.
Suitable for long-term investment : FDs are suitable for long term investment. While you can withdraw your money anytime within the first year but it may incur withdrawal penalties.
Taxation : Interest earned on FDs are taxable. However, if your annual interest earned is less than Rs 40,000 then it is exempted from TDS (tax deduction at source).
Insurance on deposit: Fixed deposits are insured up to Rs 5 Lakh per account under the government's Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme.

What are Liquid Funds ?

Liquid Funds, also known as liquid mutual funds are a type of mutual funds that invest in short term debt instruments like treasury bills, government securities, commercial papers etc. as safe alternatives to the equity market or other high-risk assets. Liquid funds come with a maximum 91 days maturity period but you can withdraw your money anytime thus offering you better liquidity and tax efficiency compared to FDs. Liquids funds are ideal for temporarily parking your wealth in the environment of economic uncertainty. Investors can expect returns similar to FDs, ranging from approximately 5% to 7% per annum.

Examples of Liquid Mutual Funds :

Axis-Liquid-G
Aditya Birla SL Liquid Reg-G
Edelweiss Liquid Direct Growth
Mahindra Manulife Liquid Reg-G
Quant Liquid-G
Franklin India Liquid Super Inst-G

To compare different liquid mutual funds : https://www.etmoney.com/mutual-funds/debt/liquid/57

Key Features of Liquid Funds :

Liquidity : Liquid Funds are highly liquid. Investors can withdraw money anytime and funds are credited within “T+1” business day ( “T” stands for transaction day ) after the redemption request is raised.
Suitable for shorter term : Liquid funds are suitable for short term investment where investors can park money for a shorter duration and withdraw it anytime at their will before 91 days maturity. Unlike a typical savings account which offers a low interest rate of just 3% , investors can expect a decent return in the range of 5% to 7%.
Returns depend upon market rate and expense ratio : The return on liquid funds can depend upon the market rate and expense ratio ( the cost levied on a mutual fund scheme). Try using a SIP calculator to project returns for liquid or equity based mutual funds.
No penalties on early withdrawal : Investors can redeem their amount without premature withdrawal penalties.
Taxation : Gains from liquid funds are subject to capital gain taxes. Any gain within 3 years comes under short term capital gains (STCG) and above 3 years falls under long term capital gains (LTCG).

Fixed Deposits (FD) vs. Liquid Funds: Differences

Feature	Fixed Deposits	Liquid Funds
Investment Duration	The duration of FDs can be from 7 days to 10 years	No fixed tenure, funds can be withdrawn anytime.
Risk	Minimal as interest rates are pre-determined.	Very low but return can fluctuate according to market rate and expense ratio.
Liquidity	Low liquidity as premature withdrawal can incur penalties ranging from 0.5 % to 1%.	High liquidity as funds can be redeemed within 24 hours.
Return on Investment	Return is almost fixed.	Varies with the market trend.
Insurance on deposit	FDs in any bank is secured up to Rs 5 lakh per account.	No such provision for investors.
Suitable For	Long term investors, who do not require their money for a long time.	Short term investors, who can access their fund any time in the near future.

Conclusion :

Both FDs and Liquid Funds are considered as safe investment options for investors. Although, returns generated by them are almost identical but serve different financial purposes to their investors. FDs are suitable for investors seeking stability, safety and guaranteed return on their investment over a long term along with safety insurance.In contrast, Liquid Funds are not as stable as FDs but better suited for short term investment as it is more liquid and does not come with premature withdrawal penalties. Additionally, Liquid Funds have a lower tax impact compared to FDs, making them a more tax-efficient option. Hence, liquid funds are ideal in that situation where you want to park your money with high liquidity needs and emergency use. The ultimate investment decision by an investor should depend upon his risk appetite and financial requirements.