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Fixed Deposits Or Liquid Funds: Where To Invest?

Fixed deposits vs liquid funds where to invest money for stable income

Fixed Deposit Vs Liquid Fund

Liquidity is very much important in life as it is the only life line which can help us in the urgent need of finance.

So, If you need liquidity along with steady returns, you have two options available in India:
  1. Bank Fixed deposit with guaranteed return.
  2. Short-term liquid mutual funds with no guaranteed returns.
It is always nice to have some spare money with you at the end of every month, even if it is not a huge amount. Have you ever thought that, what you should do with that  extra savings which gets left  over in your bank account? 

Keeping it lying idle in your savings account is not at all the best thing to do. The money should always be invested so that it grows with time. And this little spare money can eventually lead to a lot of wealth creation if invested wisely, regularly and in a right way.

You have two of the main choices to park your money as I have already mentioned earlier - Bank fixed deposits (FDs) and liquid mutual funds. 

If you are choosing between the two, you should understand which one best suits you for your financial requirement. 

Here are some salient features of FDs and liquid funds that can help you decide your investment:

Fixed Deposits

Fixed deposits are offered by commercial banks, including small finance banks which guarantees you the returns.

FDs, which are also termed called term deposits, is one of the most common and preferred investment option preferred by most of the Indians.

Besides earning interest you can get a tax benefit also if it is kept for 5 years or more. 

Fixed deposits are a sure way to make sure that, we earn little bit extra instead of leaving the money lying around in a savings account.

Features of Fixed Deposits:
  • The rate of interest you will earn on the FD will be declared to you by your bank.
  • You have to select the duration of the FD before you start.
  • Most banks offer durations of as little as 7 days and up to 5 years.
  • There may or may not be the penalties if you break your FD before the finish of deposit tenure opted for.
  • TDS will be applicable if interest income exceeds Rs 10,000 in a particular financial year.
  • Your bank may deduct TDS before paying out any interest due to you on the FD. However, if the TDS rate is lower than your personal tax rate, you are liable to pay interest on the FD when you file your tax returns.
  • Currently the best FDs are providing returns between 7 to 9% per annum.
  • If you’re over 60 years of age, you will get ask a higher interest rate on FDs.
FDs are one of the safest investment options. “The Deposit Insurance and Credit Guarantee Corporation (DICGC) automatically insures you up to Rs 1 lakh per customer across all branches of the same bank. But this overall limit applies to all your balances with the bank – savings accounts, current accounts, as well as Fixed Deposits."

Liquid Funds

Liquid funds are offered by Asset Management Companies in which returns are not guaranteed.

For financial security, you should always save 3 to 6 months of the deposits in a bank account or in liquid funds as emergency funds. If you’re thinking of parking your money for the short term, you can also consider liquid mutual funds. Liquid funds are an ideal alternative to fixed deposits because that they invest in low-risk debt and money market securities. The income earned by the mutual fund is then passed on to the investors in that mutual fund.

Features of Liquid Funds:
  • These are debt mutual funds with no lock-in period.
  • The money is invested in money market instruments like a certificate of deposits, treasury bills, commercial papers and term deposits.
  • The underlying assets have low maturity period and provide you low-interest rates.
  • You can enter and exit from the scheme anytime. Moreover, funds have no entry load and exit loads.
  • Most of the time you may also get returns higher than bank savings account, though are not guaranteed.
  • Currently, best liquid funds are providing returns between 8 to 10% per annum.
Liquid Funds do not provide any guaranteed returns, however, a well-running liquid fund is generally considered as safe as fixed deposit and generally beat the interest rate earned on FDs of similar duration.

You have the flexibility to redeem your money within just one working day with no penalties for early withdrawal, and the convenience of switching your money into other mutual funds when you feel like.

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