Bank fixed deposits vs liquid funds: Which is a better investment option?

So, as the interest rates on FDs are going up, is it time to park your savings in these deposits? Well, according to experts, the current FD interest rates are unable to beat inflation. Are liquid funds good for investment?  Many investors are confused between FDs and liquid funds 

What are liquid funds?

Liquid funds invest in fixed-income securities with maturities for up to 91 days or 3 months, such as treasury bills, commercial paper, government securities, bonds and debentures.

Manoj Dalmia, Founder and Director, proficient equities Private limited said in liquid funds, one can redeem whenever needed as there is no lock in. 

Liquid funds are subject to both short- and long-term capital gain taxes and also have indexation benefits; as a result, capital gains are taxed when an investor redeems fund units for an amount more than what they paid for them, he added.

What are fixed deposits (FDs)?

In fixed deposits, one can invest from 7 days to 10 years, but the returns are only higher in the long term and in the short term one can expect similar returns to saving accounts. 

“It is important to keep in mind that in bank fixed deposits, your investments are locked in for the chosen tenure, making early withdrawals is only possible with a penalty. This lowers the interest income and also makes fixed deposits unsuitable for emergencies,” said Manoj Dalmia.

Difference between liquid funds and fixed deposits

According to Manoj Dalmia, liquid funds and  bank FDs can both be used to park short-term surpluses and earn moderate returns with low risk. One may choose liquid funds if uncertain about redeeming.