Liquid Funds or FD: Better Investment Option?

Liquid funds are offering low- interest rate of 6.89% as compared to 7% bank fixed deposits, that raises an important question, does it make sense to invest your money in liquid funds or bank FD?

Let’s have a look!

Liquidity

Irrespective of age, still ultraconservative investors prefer to park their money in bank FD. Some even opt for a cumulative option rather than monthly interest payment options.

One of the main reasons why the investors flock towards FD is it comes with a wide array of tenures (can be as short as 7 days and can be as long as 10 years). However, liquidity could be a cause of concern.

In case, of liquid funds, your money will be parked in short-term financial instruments like treasury bills, government security and call money that demands the least amount of risk. These funds invest in the instruments with a maturity of upto 91 days. Hence, liquidity is not a concern here.

Interest Rate

Let’s explain this with the help of an example. Suppose, you invest in bank FD for one year, you will get an interest rate of 7%. This FD interest rate will not hike even when the RBI increases the interest rates, but in case, of liquid funds once the existing papers mature, you will get higher returns.

If calculated, the average returns earned on these funds will automatically become better than FD.

 

1yr FD rates, ICICI Bank is 6.90% and HDFC Bank is 7.30%. Interesting. (yes I’ve heard of liquid funds, thanks)

— Anupam Gupta (@b50) May 16, 2019

Taxation

When it comes to taxation, liquid funds score above the traditional FD. It is obvious that the investors with 30% tax bracket go for liquid funds over bank FD.  Here’s how:

The long term capital gains tax in liquid schemes is 20% with indexation benefit, while the interest earned on bank FD is 10% plus tax deducted at source, if interest income exceeds Rs 10,000. Assuming that the investors fall under the bracket of highest tax slab, FD income will be taxed at 30% plus the surcharge, while on other hand liquid funds will be charged around five or eight percent, which is a big difference.

Penalty

The premature withdrawals from bank FD will attract penalty while liquid schemes will not. These AMC will instantly credit the amount upto Rs 50,000 or may need a single working day to do it.

Partial withdrawal

Partial withdrawal is not possible in case, of conventional FD, he/she needs to break the complete FD and bear the penal charges as well. In case of liquid funds, the investor can withdraw the money as per his need.

Risk

Though there are several benefits of liquid funds, but the investors need to bear in mind that these funds are riskier than bank FD. These schemes carry credit risk.

In the end, we would like to conclude that purely conservative investors, should go for bank FD.