What are Liquid Funds
Liquid Funds are a sub-type of debt funds. Although linked to share markets, liquid funds invest their money in safe instruments. These instruments are certificates of deposits, treasury bills, etc. The investment is made for a short time which is 91 days. The interest rates on FD are comparable to Liquid Funds.
Features of liquid funds
Liquid Funds are low risk as the investment made by these funds are in safe instruments. The market factor is linked, but the share market volatility does not affect them much.
● Easily Redeemable
Liquid funds are easily redeemable at any point in time. There is no restriction on the time frame. Although the fund management fees may differ per the investment tenure. Also, most of the redemptions are done online now, which is another added advantage.
● Inexpensive than other funds
Liquid funds are not managed with changes in investment instruments often. This leads to a low cost of management as compared to other funds.
What is FD
FD or Fixed deposit is the investment done for a fixed period for a fixed rate of interest. It is one of the oldest and most common investment options. The investor knows the final amount at the time of FD maturity. This amount can also be calculated by the interest rate on the FD calculator.
Features of FD
● Lowest Risk
FD is considered to be of the lowest risk among investment options. It is not linked to variable factors that may pose a potential risk.
● Acts as a safety net
The low-risk nature of FD makes it a safety net for investors. Someone who just started earning will invest in FD first. In case of a share market crash, investment in FD serves as a safety net.
● Fixed Tenure
FD is a straightforward investment in which tenure is fixed. The investor also decides the tenure as per requirement. The Interest rate on the FD calculator can help to determine the tenure. The interest rate on FD depends on the tenure.
● Fixed Maturity amount
This feature makes FD a dependable financial instrument. Once investors finalize the bank and tenure, they can relax as there is no need for constant monitoring. The Interest rate on FD makes calculating the maturity amount easy.
Comparison of Liquid Funds and FD
● Tenure of Investment
In liquid funds, investment tenure is not fixed, while FDs have a fixed term of the investment. Fixed deposits work on the principle of a lock-in period. It does not allow breaking FD without a penalty charge. The penalty charges depend on the financial institution of the FD.
● Charges on investment
Liquid funds are a subcategory of Debt funds. They have fund management charges to be paid by the investor. FDs do not have any charges levied for management by the banks.
● Taxes on investment
Liquid funds are taxed under short-term capital gains taxes if redeemed before completing three years of investment. Liquid funds attract long-term capital gains taxes if redeemed and saved after three years of investment. FDs are not taxed for the principal amount. But the interest of more than Rs.10000/- for a financial year gets taxed. The tax amount on FD interest depends upon the investor’s tax slab.
● Risk on Investment
Liquid funds are considered low-risk instruments, but FD is safer to invest in comparison. Liquid funds get affected by market rates and interest rates, but FD rates are more stable.
● Rate of return
Liquid funds have a rate of return of around 5-9% (depending on the market). At the same time, the Interest rate on FD is fixed. They are fixed by prevailing economic conditions but remain stable in the long term, around 6-10%.
● SIP options
Liquid funds have SIPs (Systematic Investment Plan), meaning a fixed amount of investments can be made periodically. SIPs considerably decrease the risk associated with market ups and downs. FDs do not have SIP options as they are safer. However, the RDs (Recurring Deposits) option is comparable. RD is an investment of fixed amounts at fixed intervals.
Liquid Funds and FD are both great investment instruments. It depends on investors to choose one of the investment options as per their risk capacity and requirement. If FD is the preferred option, many banks also provide FD online. The Interest rate on FD calculators can help determine the type and tenure of FD. For more details, visit your nearest bank.
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