Fixed Deposits Or Liquid Funds: Where To Park Your Surplus For Stable Returns?

By | March 15, 2018

Fixed Deposits and Liquid Funds can be great investment options for risk-averse investors. They are also great instruments to earn a stable income. We’ll explain how.

Fixed Deposits Or Liquid Funds: Where To Park Your Surplus For Stable Returns?

At the end of every month, if you have some spare money left in your bank account, don’t let it lie idle there. It’s more advisable to invest the money so that it multiplies. If invested wisely, this spare money can eventually lead to a lot of wealth creation.

For risk-averse investors, all hope is not lost when it comes to investment options. Fixed Deposits and Liquid Mutual Funds are great investment options to park one’s surplus money in. Based on one’s financial requirement, one can choose between the two.

Commercial banks including small finance banks offer Fixed Deposits. If you need liquidity along with steady returns, short-term liquid funds could be a good option that might give you slightly higher returns. Liquid Funds however do not guarantee returns as much as Fixed Deposits.

Additional reading: How To Switch From Fixed Deposits To Debt Mutual Funds

Here are some salient features of Fixed Deposits and Liquid Funds that should help you decide your choice of investment.

Fixed Deposits:

Also known as Term Deposits, it is one of the most popular and sought-after investment options for many. In addition to earning interest, you can get a tax benefit if it is kept for 5 years or more. By parking your money in a tax-saving Fixed Deposit, you can claim up to Rs.1.5 lakhs as a tax deduction. The amount invested in a tax-saving Fixed Deposit will get deducted from your gross total salary. Here are some features of Fixed Deposits you should know:

  1. The bank will inform you the rate of interest you will earn on the Fixed Deposit.
  2. You need to select the duration of the Fixed Deposit before you start.
  3. Most banks offer durations of as little as 7 days and up to 5 years.
  4. There may be penalties if you break your Fixed Deposit before the deposit tenure opted for.
  5. TDS will be applicable if the interest income exceeds Rs.10,000 in a particular financial year.
  6. Your bank may deduct TDS before paying out any interest due to you on Fixed Deposit. However, if the TDS rate is lower than your personal tax rate, you are liable to pay interest on the Fixed Deposit when you file your tax returns.
  7. Currently, the best Fixed Deposits are providing returns between 7-9% per annum.

Individuals aged above 60 years can also ask their bank for any preferred rate available to “Senior Citizens” because senior citizens generally get a higher interest rate on Fixed Deposits.

Additional reading: 7 Reasons Why Fixed Deposits Are Better Than Savings Accounts

Liquid Funds:

To safeguard yourself against future emergencies, you should always save 3-6 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 they invest in low-risk debt and money market securities. The income earned by Mutual Funds is then passed onto the investors in that Mutual Fund.

Here are some features of Liquid Funds that you ought to know:

  1. These are Debt Mutual Funds with no lock-in period.
  2. The money is invested in money market instruments like a certificate of deposits, treasury bills, commercial papers, and term deposits.
  3. You can enter and exit from the scheme anytime. Moreover, funds have no entry and exit loads.
  4. Most of the time you may also get returns higher than a Savings Account, although that’s not guaranteed.
  5. Currently, best Liquid Funds are providing returns between 8-10%.
Additional reading: Why Liquid Funds Are A Better Bet In This Falling Interest Rate Era

Liquid Funds do not provide guaranteed returns. However, a well-run liquid fund is generally considered as safe as Fixed Deposit and generally beats the interest rate earned on Fixed Deposits of similar duration.

Additional reading: Read More On Fixed Deposits And Invest Wisely

Liquid Funds or Fixed Deposits, whatever may be your pick, we have a wide range of options available on BankBazaar! Not looking for either? We still have you covered with other fantastic financial products.

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