These are two instruments which are used to earn some interest on money lying idle in bank or money which has been set aside for a purpose. We understand what are fixed deposit what many investors are not aware of is liquid fund Well Liquid fund as the name suggests are Mutual Fund Schemes keep our money “liquid” (almost cash). These liquid funds are debt funds that work in money market instruments It is a market for short term borrowing and lending. Overnight, two day, ten day, a month paper is what is bought and sold. For ease of understanding we will compare two products in each category. Two things come in to play while comparing the two product categories:
1. Return on Investments
A Fixed Deposit will give a known rate of interest for a known period. So say a 61 – 90 days fixed deposit in HDFC Bank will fetch you a return of 5.5% for a senior citizen.
A Liquid Fund the rate of return is not known in advance instead it fluctuates based on the NAV .However the risk is minimal and the typical return for a decent Liquid fund would range from 5-7% .For example the DSP ML Liquid Plus Regular Fund has given one year return of 8.67%
2. Tax Treatment:
The interest on Fixed deposit is taxed by adding it to the assesses income .Hence if you belong to the highest tax bracket you will be taxed at 30%, thus wiping out a huge chunk of return.
A Liquid Fund has an advantage here if you opt for a dividend option the dividend is tax free in the hands of the investor that’s right.”NO TAX” for you. In some schemes like the HDFC AMC’s Treasury plan you get daily dividend on the investment made thus giving you the freedom to remove money on any day you need it.
While the fixed deposit scores in terms of reliability of return .Liquid fund scores on the liquidity, rate of return and tax treatment. Investments companies recommends liquid funds for those who are income tax assesses & need to park funds for shorter tenures.