Fixed deposits and liquid funds are not the same thing. They differ in terms of features, benefits, limitations, market risks and other factors. Before investing or choosing one for investment, it is always a good idea to understand the difference between a liquid fund and a fixed deposit.
In this blog, we will understand the difference between liquid funds vs FDs and more about them.
What is the Difference between Liquid Funds vs FD or Fixed Deposit?
|Details||Fixed Deposit||Liquid funds|
|Stake||Low risk||Higher risk (compared to fixed deposits)|
|Return||Fixed interest rate||No guaranteed returns
Tends to offer better returns compared to fixed deposits
|Liquidity||Fixed deposits have maturities from 7 days to 10 years (varies from bank to bank)
Early draw draws a penalty
|Get out of the burden imposed on funds redeemed within 7 days of holding them
From the 7th day onwards, there is no outgoing charge on redemption
Offers better liquidity
|Length of service||7 days to 10 years||7 days to 91 days|
|Suitable for||Short and long term investors||Long term investors|
What is Liquid Fund?
One of the many types of mutual funds is a liquid mutual fund. These funds are invested in short-term interest-bearing money market instruments such as high-yielding corporate and government bonds, securities, marketable securities, and so on. In most cases, liquid funds mature within 91 days.
- Liquid funds tend to offer security in the form of capital preservation
- These funds are invested in highly rated money market instruments
- They are considered a slightly safer investment option than other types of mutual funds
- The investor can redeem the funds at any time, and the funds will be deposited into his bank account within 24 hours
What are the Benefits of Liquid Funds?
Listed below are some of the benefits of liquid funds-
- Liquid funds are considered good in terms of providing better returns to investors than savings and current accounts
- They are less stable because they are invested in high credit rating instruments
- Liquid funds have no outgoing burden
- Liquid mutual funds mature in 91 days
- These funds are liquid and can be disbursed in one day
- They are not affected by interest rate fluctuations
- This fund is managed by professionals
- Liquid funds require a minimum amount of Rs 500 to invest
- They offer growth and dividend options
- Liquid funds have a lock-in period of 7 days, unlike regular fixed deposits where premature withdrawals attract penalties to be paid
Who is Eligible to Invest in Liquid Funds?
The following are eligible to invest in liquid funds-
- This fund is suitable for investors with big cash
- For those who want to invest in short-term investment instruments
- Can be used as a medium to invest in equity mutual funds
- Anyone who wants to invest some money as an emergency fund
- A person who wants to invest an unlimited amount of lock-in period
What to Pay Attention to When Investing in Liquid Funds?
Some things to consider about liquid funds before investing in them-
- Liquid mutual funds, one of many types of mutual funds, are not affected by market conditions as they mature in 91 days. However, it is advisable to ensure that the Net Asset Value (NAV) is not affected by fluctuations in the net asset value
- Fees must be paid by investors to manage liquid funds
- Investors, with the aim of creating an emergency fund, can find liquid funds as ideal options for investing. These funds provide higher returns while allowing investors to redeem their funds at any time.
- Before investing in a liquid fund, it is advisable to connect with the experts and find out how much interest the fund is generating
What is Fixed Deposit?
Fixed deposits are also known as ‘term deposits’ or ‘term deposits.’ They are one of the safest investment instrument services provided by non-banking financial companies (NBFCs) and banks. FD allows investors to deposit a lump sum amount for a predetermined period of time. Apart from that, FD provides users with a number of other features like-
- Depositors can earn interest on their deposits for a certain period of time.
- Once locked, interest rates are not affected by market changes or interest rates.
- The fixed deposit amount cannot be withdrawn before the maturity date, and if the saver wishes to do so, he must pay a fine.
- Depositors can earn interest either on a regular basis or on the maturity of their FDs.
- The FD term can range from 7 days to 10 years or more (may vary from bank to bank)
What are the Benefits of Fixed Deposits?
The benefits of fixed deposits are numerous, some of which are listed below-
- Fixed deposits are considered the safest investment option when compared to other types of savings investments.
- Interest rates on deposit accounts remain unchanged even after market fluctuations, that too, for a specified period of time
- When the fixed deposit account matures, the customer can direct the bank to credit the amount or reinvest the amount for another predetermined period of time.
- FD provides guaranteed interest rate
- There are several banks that offer tenors from 7 days to 10 years
- Some banks offer fixed deposits with tax savings benefits
- Customers can use the FD calculator on each bank’s website to calculate the interest they will receive on the amount deposited.
- The bank offers its customers the flexibility to choose a fixed deposit tenor
Who is Eligible to Open a Fixed Deposit Account?
The following are eligible to open a fixed deposit account-
- Someone who wants to continue to save while avoiding market risk
- A user who works as a housemaid and has a good income
- If you have taxable income, FD can be a tax-saving investment instrument
- A retiree looking for a steady source of income
What to pay attention to when Investing in Fixed Deposits?
The right way to choose a fixed deposit is through the following factors-
- Compare the different types of fixed deposits provided by different banks.
- The type of fixed deposit that best suits your needs
- Lender credibility as determined by ICRA and CRISIL . ratings
- Preferred bank customer service
- If the bank provides flexibility regarding FD,
- If a large number of documents have to be submitted, or if only KYC documentation is required (as in the case of Paytm Payment Bank fixed deposit process)
Is it possible for a salaried professional to invest in liquid funds?
Investors who want to invest in short-term investment instruments can invest in liquid funds. Additionally, anyone looking to build an emergency fund can consider investing in a liquid fund.
What is the maturity period of liquid funds?
Liquid funds have a term of 91 days.
When is the fixed deposit amount due?
The maturity of the fixed deposit depends on what the investor has chosen as the tenor at the outset. In general, banks make it easy for investors to open FDs for maturities ranging from 7 days to 10 years or more.
Is it possible to open a FD online?
Yes, Paytm bank and Payment Bank makes it easy for users to open FDs online by following a few simple steps.