1. Type Of Investment

Banks lend money to borrowers with the capital individuals invest in fixed deposits, savings accounts, and recurring deposits. That's why banks pay you interest in exchange for staying locked-in in FDs.

Liquid funds are debt funds that invest in relatively safe securities like T-bills, commercial paper, corpora

1. Type Of Investment

Banks lend money to borrowers with the capital individuals invest in fixed deposits, savings accounts, and recurring deposits. That's why banks pay you interest in exchange for staying locked-in in FDs.

Liquid funds are debt funds that invest in relatively safe securities like T-bills, commercial paper, corporate bonds, government bonds, and more. “Invest” means to lend money when it comes to debt funds. 

“Invest”, in the context of debt funds, means that the fund lends money to the government, corporations, etc. The fund receives an interest in exchange which is the returns that investors earn. This is what makes them safer than other mutual funds. You can consult a Cube Wealth Coach or download the Cube Wealth App.

2. Lock-In Period

Bank FDs carry a lock-in period of 7 days to 5 years. Your money will be blocked in the FD throughout the tenure and there are penalties for premature withdrawals. However, partial withdrawals are allowed during emergencies. This is good for overtly conservative folks and those who are not aware of better financial instruments.

Liquid mutual funds, on the other hand, do not carry a lock-in period and are highly liquid. Liquid fund withdrawals are generally processed in 1-3 business days which can be very useful for emergencies. 

Though the returns on Liquid Mutual Funds are not guaranteed. Did You Know? The Cube ATM feature allows you to withdraw money from your liquid fund investment to your savings account in less than 30 minutes. 

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3. Returns

Gone are the days when FD returns were as high as 13%. Currently, the interest rate on bank FDs ranges from 4-5% which is generally lower than the returns generated by the best liquid funds on the Cube Wealth app.

4. Risk

Truth be told, bank FDs are one of the safest investment options available to Indian investors. FDs are not linked to the market and don't lose their value during volatile economic conditions.

Moreover, FD returns are guaranteed. On the other hand, liquid funds are known to be safer than other mutual funds. The portfolio of a liquid fund matures in 60-91 days. 

This simply means that the liquid fund gets its principal back within 60-91 days while generating reasonable returns through the interest earned. 

It's important to remember that liquid funds are market-linked instruments that are riskier than FDs. But, here's the important upside, liquid funds are unlikely to erode your wealth as they grow with the market. 

Read this blog to know more about the best SIP mutual funds in India

1. Historical Returns

There's no way around it - bank FD returns have been plummeting since the early 1990s. However, the appeal of FDs lies in the fact that they are known to be safe and can generate 4-5% returns. 

You must evaluate if these returns, along with the relative safety, can be useful to your portfolio for diversification or as a means to rebalance an aggressive or moderate portfolio.  

Read this blog to know more about investment options better than FDs

2. Tax Benefits

Not all FDs can help you save tax. In fact, almost all FDs fall under this umbrella except one - tax-saving FDs. These FDs can help you claim deductions of up to ₹1,50,000 under Section 80C. 

Here's the catch - the lock-in tenure is 5 years and the interest earned (>₹40,000) is taxable. Tax benefits aside, the returns earned through FDs have been known to barely beat inflation on top of being taxed.

1. Historical Returns

Historical data suggests that liquid mutual funds generate returns in the 5 to 7% range. They invest in debt securities and their portfolio matures relatively quickly. 

That's why liquid funds are suitable for the short term and emergency bucket. That does not however mean that liquid funds are not ideal for the medium term. Here's a comparison of liquid fund returns Vs FDs. 

2. Tax Benefits

Liquid funds are taxed like debt funds. The taxation looks like this:

1. What are fixed deposits (FDs)?

Ans. Fixed deposits are a traditional investment option where an individual deposits a lump sum amount with a financial institution or bank for a specified tenure at a fixed interest rate. They are known for capital preservation and guaranteed returns.

2. What are the key differences between liquid funds and fixed deposits?

Ans. Liquid funds are market-linked mutual funds that invest in short-term debt instruments, offering the potential for higher returns but with some market risk. Fixed deposits, on the other hand, provide guaranteed returns and are not market-linked. FDs offer capital protection and a fixed interest rate.

3. Which is better for short-term cash management?

Ans. Liquid funds are generally considered better for short-term cash management because they provide higher liquidity and have the potential for better returns than fixed deposits. However, the choice depends on individual financial goals and risk tolerance.

4. Are there any tax differences between liquid funds and fixed deposits?

Ans. Taxation varies between liquid funds and fixed deposits. Interest earned on fixed deposits is subject to income tax, while gains from liquid funds are taxed as capital gains, which can have different tax rates based on the investment duration.