There are numerous situations when your savings account cash are sitting idly in the bank. Assume you'll need money for a trip in June, but you'll have saved up the money by January. Either retain your money in a low-interest savings account or put it into an investment for a short time to earn better returns. Now you have two choices.
If you want to protect your first investment, be sure it's in a safe option.
Investing in fixed deposits or liquid funds is an option in this situation.
Fixed Deposits
It is a financial product issued by banks and non-bank financial institutions (NBFCs) that guarantees a fixed rate of return for a certain time period. Even while the interest rates aren't particularly great, they're still better than what your savings account gives. It's possible to set up a fixed deposit for a period of time ranging from 7 days to 10 years, depending on the amount of time you have available.
An FD's interest rate depends on the length of the investment. For a longer period of time, you get a better rate.
Liquid Funds
Liquid funds are debt products that invest in fixed income instruments such as treasury bills, government securities, commercial papers and more. If you're looking for a short-term investment, this is a decent alternative.
Its goal is to secure investors' wealth while also giving higher returns than a savings account. As a result, they exclusively purchase high-end equipment.
Fixed Deposit vs Liquid Funds
For one thing, FDs have a fixed rate of return; for another, liquid funds invest in money market instruments and, as a result, their rate of return might fluctuate. Liquid funds, on the other hand, tend to have a greater rate of return than FDs because of this.
A bigger risk component than FDs, but lesser risk than mutual funds or trading.
Fixed deposits, on the other hand, have a period of time during which they are locked in. There are penalties for early withdrawals, but it's possible. Contrarily, liquid funds provide a higher level of flexibility. After a 7-day grace period, you are free to cash out your units whenever you choose with no exit load.
Liquid funds have a maturity of 91 days, whereas FDs have a range of 7 days to 10 years. You can reinvest if you decide not to take your money out after the 91-day period.
Taxation
Your FD interest is included in your taxable income and taxed according to your income tax bracket. Despite this, the bank/NBFC deducts a 10% TDS when you get your interest payments.
In the case of liquid funds, long-term capital gains tax is imposed if they are held for more than three years. They are taxed at a rate of 20%, which is indexed. You'll have to pay income tax on the interest you've accumulated if you cash out your investments within three years of investing.
FDs and liquid funds both have their advantages and disadvantages. So, how are we supposed to choose between the two options?
Who should invest in an FD?
Investors with a low tolerance for risk favour FDs over other investment options. Because they are sold by banks, FDs are regulated by the RBI, making them one of the safest ways to invest. Check the CRISIL rating of an NBFC's FD before you buy in one. Long-term investments yield bigger returns, thus they may be less profitable in the near term. If you keep your money in a savings account for five years, you may be able to get a tax break.
Who should put money into liquid funds?
Investors who are looking for a short-term place to keep their capital might benefit from liquid funds. Savings and money market accounts offer a set rate of return, whereas certificates of deposit (CDs) do not. They do, however, carry a higher level of risk than FDs.
Fixed deposits and liquid funds are both excellent low-risk investing alternatives, but they have distinct advantages for various clients. Before making a decision, think about your risk tolerance and financial objectives.
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