Liquid Funds Vs FD

Liquid Funds Vs FD

The main difference between liquid funds and fixed deposits is that fixed deposit schemes give fixed interest rates and are offered by banks and post offices. On the other hand, liquid funds are known to give better interest rates than FD. 

This article covers: 

What is Liquid Fund?

A liquid fund is a type of mutual fund scheme that primarily invests in debt and money market instruments with a maturity of up to 91 days. These instruments may include Treasury bills, Commercial Paper, Certificate of Deposits, etc. You can redeem the fund within T+1 day after making a redemption request. Hence, it makes them highly liquid investments.

The key features of liquid funds are that they are suitable for short-term investments and do not have exit loads for investments held for more than a week. The primary source of earnings for liquid funds is through the interest income on their debt holdings.

However, liquid funds are subject to interest rates and credit risks, which may impact the fund’s returns. Also, investments in liquid funds are subject to income tax, with STCG being taxed at the investor’s income tax slab rate and LTCG being taxed at 20% with indexation benefits after a holding period of three years.

Fixed Deposit Meaning

A fixed deposit (FD) is an investment instrument offered by banks and other financial institutions in which an individual invests a certain sum of money for a fixed time at a predetermined interest rate. At the end of the tenure, the financial institution guarantees to return the invested sum and the interest earned.

Fixed deposits are considered a safe investment option since they offer guaranteed returns and are less risky than other investment avenues like stocks and mutual funds. The interest rates offered on fixed deposits may vary based on the duration of the investment and the financial institution offering the investment.

Difference between liquid funds and fixed deposits

The key difference between liquid funds and fixed deposits is that liquid funds allow you to invest in debt instruments such as treasury bills, commercial papers, and AAA-rated bonds and offer better returns than FD. On the other hand, fixed deposits offer a fixed rate of interest which is comparatively lower than liquid funds. 

Liquid Funds Vs FD Returns

The returns on liquid funds are better than fixed deposits, especially when the fixed deposit scheme offers a low-interest rate. However, the returns on liquid funds are not fixed as they invest in various debt instruments with varying yields and maturities. 

Also, the returns of liquid funds are determined by the prevailing market conditions and the interest rates offered by the underlying instruments in which the fund has invested. As the interest rates fluctuate, the returns of the liquid funds also vary. 

On the other hand, the returns on fixed deposits are fixed, and the returns on FD are comparatively lower than liquid mutual funds. 

Liquid Funds Vs FD Taxation

The interest earned on fixed deposits is taxable as per the individual’s income tax slab. Banks and other financial institutions deduct TDS (Tax Deducted at Source) at the rate of 10% if the interest earned on fixed deposits is more than Rs. 40,000 (if the individual has submitted the PAN details). 

However, if an individual has not submitted the PAN details and the total interest earned on all fixed deposits held in a financial year exceeds Rs. 40,000, TDS is deducted at the rate of 20%. To avoid TDS, individuals can submit Form 15G/15H if their total taxable income for the year is below the minimum taxable limit. It is important to note that the interest earned on fixed deposits is added to the individual’s total income, and tax is calculated accordingly.

On the other hand, the tax on liquid funds in India depends on the holding period of the investment. If you hold liquid fund investments for more than three years, your returns will be considered long-term capital gains and taxed at 20% after indexation. Indexation is a process that factors the inflation rate to adjust the cost of acquisition and reduce tax liability. While for investments held for three years or less, the returns are taxed as per your applicable income tax slab. 

Best liquid funds in India 2024

Liquid fund name1-year return Fund size RatingRisk 
Mahindra Manulife Liquid Fund 5.5%Rs. 520 Cr 5 starsLow to Moderate 
Navi Liquid Fund 5.5%Rs. 126 Cr5 starsLow to Moderate 
Quant Liquid Fund 5.44%Rs. 1,481 Cr5 starsModerate 
Baroda BNP Paribas Liquid Direct Fund 5.5%Rs. 7,014 Cr5 starsModerate 
IDBI Liquid Fund 5.4%Rs. 634 Cr4 starsLow to Moderate 
PGIM India Liquid Fund 5.4%Rs. 730 Cr4 starsLow to Moderate 
Edelweiss Liquid Fund 5.4%Rs. 1,397 Cr4 starsLow to Moderate 
Axis Liquid Direct Fund 5.4%Rs. 29,632 Cr4 starsLow to Moderate 
Aditya Birla Sun Life Liquid Fund 5.5%Rs. 39,953 Cr4 starsModerately high 
UTI Liquid Cash Fund 5.4%Rs. 23,212 Cr4 starsLow to Moderate 
JM Liquid Fund5.4%Rs. 1,854 Cr4 starsLow to Moderate 
Sundaram Liquid Fund5.5%Rs. 3,609 Cr4 starsLow to Moderate 
Union Liquid Fund 5.4%Rs. 1,471 Cr3 starsLow to Moderate 
Bank of India Liquid Fund5.5%Rs. 462 Cr4 starsLow to Moderate 
Sundaram Money Fund 3.4%Rs. 3,144 Cr3 starsLow to Moderate 

Best fixed deposit plan in India

Bank offering fixed deposit plans Interest rates offered to individuals Interest rate offered to senior citizens Minimum deposit Tenure 
Bank of Baroda 3.00 to 5.65% 3.50 to 6.65% Rs. 10,0007 days to 10 years
Axis Bank 3.50 to 6.10%3.50 to 6.85% Rs. 5,0007 days to 10 years 
Canara Bank3.25 to 7.00%3.25 to 7.50% Rs. 1,00015 days to 10 years
Bandhan Bank 3.00 to 5.50%3.75 to 6.25%Rs. 1,0007 days to 10 years
HDFC Bank 3.00 to 4.00%3.50 to 4.50% Rs. 5,00033 to 99 months
Punjab National Bank 3.00%-5.75%3.50%-6.25%Rs. 1,0001 to 10 years
Union Bank 3.00%-6.70%3.50%-7.20%Rs. 1,0007 days to 10 years
ICICI Bank 3.00 to 6.00%3.50% – 6.60%Rs. 10,0007 days to 10 years
State Bank of India3.00 to 5.85%3.50 to 6.65%Rs. 1,0007 days to 10 years
Kotak Bank 2.50% – 5.25%3.00% – 5.75%Rs. 5,0007 days to 10 years

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Liquid Funds Vs FD- Quick Summary

  • The biggest difference between liquid funds and fixed deposits is that liquid funds can be redeemed any time without paying any exit load. On the other hand, fixed deposits can not be redeemed before the maturity date. 
  • Liquid funds offer better returns than fixed deposits, but they are riskier as they are linked to the market and economy. On the other hand, fixed deposits are low-risk investments that offer guaranteed returns, but the returns are comparatively lower than liquid funds.
  • Some of the best liquid funds in India in 2024 include Mahindra Manulife Liquid Fund, Navi Liquid Fund, Quant Liquid Fund, Baroda BNP Paribas Liquid Fund, and HDFC Liquid Fund.
  • Some of the best banks that offer fixed deposit plans in India are Bank of Baroda, Axis Bank, HDFC Bank, Canara Bank, Bandhan Bank, Punjab National Bank , State Bank of India, ICICI Bank, Union Bank. 
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Liquid Funds Vs FD- Frequently Asked Questions

1. What is the difference between a liquid fund and a fixed deposit?

A fixed deposit is an account that offers a fixed rate of interest on your investment and the interest rates of FD are generally 5 to 7%. A liquid fund, on the other hand, is an investment vehicle that allows for easy and quick access to your money.

2. Which investment is better than FD?

Several types of investments may offer higher returns than fixed deposits (FDs), such as mutual funds, ELSS funds, and real estate, but they also come with different levels of risk.

3. What are the disadvantages of liquid funds?

  • Liquid funds can be volatile.
  • Liquid funds do not give any guaranteed returns. 

4. What is better than liquid funds?

Investment options like equity mutual funds, real estate, etc provide better returns than liquid funds. 

5. How risky is liquid fund?

Liquid funds have risks involved, such as credit risk if the issuer of the bonds in the fund defaults or if the credit rating of the underlying securities decreases. 

6. Is Liquid Fund is taxable?

If the holding period is less than 3 years, the capital gain is called a short-term gain and is taxed at the applicable income tax slab rate. If the holding period is more than 3 years, the capital gain is considered a long-term gain and taxed at a rate of 20%, with the benefit of indexation available to adjust for inflation.

7. What is the disadvantage of FD?

  • Interest rates on fixed deposits do not always keep up with inflation rates. 
  • Interest rates on FD have been decreasing, making them less attractive as an investment option. 

8. Is interest on FD taxable?

The tax liability on the interest earned from FDs is deducted by the bank or financial institution at the rate of 10% (or 20% if the PAN is not provided) as TDS (Tax Deducted at Source) if the interest income is above the prescribed threshold limit, which is Rs. 40,000. 

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