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?
Also Read: Latest Recurring Deposit (RD) Rates in India to park your short term money
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.
Features of Liquid Funds
- 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.
Liquid Funds Vs Fixed Deposits – Which one is better?
- 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.
Also Read: Top Mid cap / Small cap mutual funds which are out performing now
- 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.
Some of the top Liquid Mutual Funds to invest now
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
Conclusion: If you want to park your money for short term of 1 to 6 months, liquid funds would be the best bet for you. Consider above factors before investing in such funds.
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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Suresh
Liquid Funds Vs Fixed Deposits – Which one is better
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Hi Suresh
Have been your avid follower. Here's my question needing your suggestion.
I have invested 45 lacs in Liquid/Debt funds over the last 6 months from which I had started to do STP to Equity/Balanced funds. I had not invested the amount directly in Equity funds as i will be redeeming 90% of the money invested within the next 4 months to purchase a flat (costing about 40 lacs).
I also have 32 Lacs unutilized funds right now which I want to invest in some 5-6 good mutual funds for atleast 4-5 yrs.
1. What are some of the good funds that I can invest this 32 lacs in? I'm looking for High performing funds which will yield yearly returns of Rs.45000 from year 3 onwards. And there are no other financial goals I have apart from the above situation.My risk appetite is average.
2. Can I invest say 5 Lacs in say 6 Funds in one shot? is it advisable to do this considering that the NAV may be at peak for some funds? Or whats the other way to distribute and invest 5 Lacs in 6 funds max?
Thanks
Vivek
Dear Sir/madam,
As GOLD prices are increasing daily, Whetherthis is better short term investment compared with FD or LIQUID FUND?
In short term they look good, however in medium to long term, one need to wait and see
Dear Sir/Madam,
I am planning to invest app. 20 lacs in LIQUID FUNDS for 3-6 months.
Kindly advise whether we can take loan against that investment as security?
I would like to invest in daily div dist. option … how its calculated ? does nav will go down daily based on div payout ? does this div income will be tax free for me or it will be added to my income?
Can some one top five liquid fund for 12 to 18 months investment plan.can I extend the same if there no requirement at the end of the period.should I go for dividend or growth option.There is no tax issues.
Venkatasubramanian, You can invest in top liquid funds like Escorts liquid fund or JP high liquidity fund etc., Invest in growth option as it would provide good returns
with reference to above given information by you, In Liquid fund, who/which fund house gives us credit of our funds redeemed before 2 pm on same day ????
income of the liquid fund covered into taxslab or not sir
Yes. It would be a capital gain, you should club and pay income tax based on that
I have one gold fund for the last two years which is under performing. Should I continue or exit?
Gold is underperforming investment option now. Do not do any fresh investments now. You can review it after 6 months
Hi Suresh,
Thank you for your reply to my previous query.
Can you please suggest some Short term debt funds.
Thanks again.
Ganesh, I have indicated in this article itself.
One will get an interest of 4% in savings bank account and nothing can beat liquidity of savings bank account. Again, yes bank offers 7% on savings bank if deposit is above 1lakh.
The “4%” and the “7%” that you are saying is annual ROI. 4% comes out to be approx. 0.3% per month.
Thanks for clearing my doubt!
hi suresh,
you have mentioned here about liquid funds and normal fixed deposit…for parking your money for 6-12 months. i think you shoud take special fds like mod in sbi, money multiplier plan in icici which will also give 4 to 9 % return as month wise..
Gourav, However, you may not get interest of 3% or 4% if you invest for 5 months or 6 months. They would pay you less interest. Just check
Hi Suresh, my query has gone unanswered. And now it has even been removed! Was it irrelevant or difficult?
No Dr. Jain. I responded. I have been sufferring from spondylitis and not able to answer immly. Pls bear with me.
Even for long term holding period (>1 year), once could prefer Liquid funds over FD. This is because bank automatically deducts 10% TDS at the end of each financial year (considering one falls in taxable bracket), whereas for liquid fund only on selling it one has to pay tax. So if an investor wants to invest for say 3 years, and assuming FD and Liquid Fund gives same returns, then liquid funds return would be compounded (without any Tax deduction for first 3 years) whereas in FD your amount will be reduced at least 10% each year.
Agree with you Vinod. However we all should invest in mutual funds with an objective. You are parking your funds in liquid funds as you may need any time. If you do not need for less than 1 year, you beter invest in short term debt funds
Hi Suresh,
I need a clarification. When comparing to a FD (cumulative), do you think Liquid funds is better?
Ganesh, Like I indicated these are good for short term of less than 1 year and where you need money with few hours or 1 day notice. FD Cumulative would come into picture if you are investing for > 1year
Hello Sir,
Again, very informatics article by you. I do highly appreciate your efforts to provide us better information. I got my answer for emergency fund investment.
Thank you
Suresh,
Nice article.
Hi Suresh,
I suppose the long term capital gain benefit tax applies to liquid funds also right? If so will it not affect the returns upon redemption. How much should the user be considering the LTCG as a deciding factor to invest in liquid funds?
Raj, Yes it woud. However LTCG is after 3 years only.
So if you invest in a liquid fund and withdraw it before 3 yrs then the returns will be added to the income and taxed accordingly right? Then in such case how do liquid funds stand out as a great option for people investing for less than 3 yrs?
Raj, Like I indicated, these are good for short term investment options of less than 1 year (where tax treatment would be similar for both FD or liquid funds). Instead of parking at lower interest rates in FD you can consider liquid funds. 1 year or <=3 years tax treatment is same for liquid funds. This is what I indicated
Thank you for the article.
I have invested 5 lakh in ICICI prudential elite wealth 11 RP.
I was not made aware of the 5 year lock in or the yearly 5 lakh top up.
Is this a good investment for 5 year term?
Look forward to your reply.
Regards
Nitesh
This is ULIP plan. When you have invested? After 2009, ULIP charges has been reduced. Pls check ULIP charges and then take a decision.
Hi Suresh,
I took the plan out on 01 November 2014.
Regards
Nitesh
Hi Suresh
I have heard that liquid funds are good if you want the money within 3 months. For longer duration, short term debt funds are ideal. What do you think? For example, if I want to park Rs 1 lakh for 2-3 years, I can put all of it in a liquid/debt fund and then do STP of 5-10000 pm into an equity fund. In such cases, would a liquid fund be better or short term debt fund?
It depends on the tenure and your requirement. If you observe the details I have given these are good for immediate liquidy. If you have parked for some reason and that reason is you may need within short notice of 2-3 days, then liquid funds are better. If you need say atleast 7-10 days later once you think you need, then you can go for short term debt funds.
Hello Sir,
I have a plan to buy a flat in 3 years, for that I am planning to save 30K per month.
My friends suggested me to invest in short term debt funds, instead of RD as my annual income comes under the slab of 20%.
I am really in confusion, could you please suggest some good short term debt funds OR some other alternate. Your suggestion would really help me a lot.
Regards,
Ashish
Ashish, You can invest in debt funds, balanced funds (to some extent) and recurring deposits.
i deposited in FD, but i dont know about liquid funds after reading your article its better for short term period does icici bank is good .
Charan, Pls check the top 5 liquid funds indicated in my article now, you can consider them.
Hi Suresh,
Please suggest top 5 liquid funds to invest in.
Rohit, Based on several readers request, I have added top 5 liquid funds in this. Thank you.
I guess if you include below point also in comparision.
Ease of doing is also important thing.
Many elders and less finance knowledge persons prefer to step into bank and their FD is ready with in 15 minutes….
Whereas Liquid fund application form itself such a complex one for basic retail investor. those who has IT knowledge and online banking, they can do Liquid funds in a mouse click…..
Good article. With regards to tax treatments,
Is it not 3 years?
One of my friend is looking for suggestion. He do not want to take any risk. So, he prefers Debt funds. One of the long term debt fund, “ICICI Prudential Long Term Fund Direct Plan Growth option” shows around 20% return in last 1 year. Is it good to invest in this scheme for long term like 15 to 20 years?
Sri, What I meant here is investing in FD or Liquid funds < 1 year, how tax treatment would be there. You can consider this as 3 years, but we should not invest for 3 years in liquid funds. 2nd point, this is good fund. Debt funds are always better than bank FD's both in terms of returns and tax treatment after 3 years. However last 1 year returns should not be compared. Just this 5 year annualised return which is at 9.3%.
Hi.Mr.Suresh
Can you tell me the best liquid fund for less than one year in any one of the following fund house ICICI, BIRLA, UTI, RELIANCE
Based on several readers request, I have added top 5 liquid funds in this article itself.
Hi Suresh,
I am regular to your blog,very informative articles keep up the good work going
I am planning to buy online term insurance.
I am 32Years old and married with one kind.
kindly suggest me the term insurance along with accedentail rider.
There are several term insurance policies. Majority of the online policies do not offer riders, but offer accidential riders. You can consider HDFC click2 protect, ICICI term insurance plan etc.