Liquid Funds Vs Fixed Deposits – Which one is better?
If you want to invest for short term period, generally we invest in liquid funds or fixed deposits. Do you know that liquid mutual funds score high comparing to bank fixed deposits (we would not be comparing with company fixed deposits as they cannot be liquidated immediately) and would earn you higher returns if you can plan and invest wisely. I aimed to buy a property in the last 6 months. I wanted to park my money for 3 to 6 months duration for this special goal. I was not sure when I would need money. I parked money in liquid funds and recently when I redeemed, I got higher returns compared to fixed deposits. What are differences between Liquid Funds and Fixed Deposits? Liquid Funds Vs Fixed Deposits, which one is the best investment option for short term?
click What are liquid funds?
Liquid mutual funds primary objective is to invest in debt instruments like commercial papers, fixed deposits, treasury bills etc. These debt instruments have a lower maturity period, hence fund manager can easily liquidate and sell them immediately.
- Zero lock-in period.
- Funds can be redeemed within 1 working day.
- You can sell them before 2 pm and get the funds on the same day. If you sell them after 2 pm, you would get funds in your account by next day morning.
- They do not have an entry or exit loads.
- Lowest interest rate risks as they invest in short term fixed income debt securities.
- Highest return compared to fixed deposits. It would range between 4% to 8% per annum.
- Liquid funds come with various plans like growth plan, dividend plans, daily dividend plans, weekly dividend plans, monthly dividend plans etc.
- Investors can invest in direct plans as they contain a low expense ratio and provide high returns.
- Funds can choose good liquid mutual funds based on Crisil Rank, Value Research Star Rating, high Assets under Management (AUM) and past year's performance.
- Returns: Liquid funds invests in short term securities and offers returns ranging between 4% to 8% per annum. On the other hand bank fixed deposits offers 4% to 9% returns per annum depending on the tenure. Lower the tenure, interest rates are lower.
- If you invest say for 3 months, the returns from bank fixed deposits would be approx 1.5%. On the other hand, liquid funds would offer more than 2% returns (approx).
- If you invest say for 6 months, the returns from bank fixed deposits would be approx 3%. On the other hand, liquid funds would offer more than 4% returns (approx).
- Hence liquid funds score high comparing to fixed deposits for short term period of less than 1 year. If you invest for more than 6 months, the returns would be almost same.
- Tax Treatment: Dividends received from liquid mutual funds are tax free in the hands of investors. However, mutual fund houses pay 28.325% as dividend distribution tax on such dividends before distributing to investors. Regarding growth plans, if you sell them before 1 year, any returns need to be added to your income and you need to pay income tax based on your tax bracket. Hence, no change in tax treatment of liquid growth plans vs fixed deposits.
- Closure / Redemption: You can sell liquid funds before 2 pm and you would get funds in your bank account on the same day. If you sell after 2 pm, you would get your funds on ext day morning. On the other hand, fixed deposits closure can be done immediately. Most of the banks are crediting the funds immediately within the day or same hour.
- Interest rate risks: Since liquid funds invest in short term securities, RBI rates would have an impact on such securities. On the other hand, bank fixed deposits would also have impact with interest rate risks. Most of the times, both would go hand in hand, sometimes, bank would not change any interest rates due to minor RBI rate changes.
These liquid funds have provided returns of over 2% in 3 months, 4.3% returns in 6 months, 9% returns in 12 months period.
1) Can Robeco Liquid Plan
2) SBI Premier Liquid Plan
3) DSP BR Liquidy Plan
4) HSBC Cash Fund
5) Axis Liquid Fund
Readers, what are your experiences in liquid funds? Do you believe that liquid mutual funds score high comparing to bank fixed deposits?
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Liquid Funds Vs Fixed Deposits – Which one is better