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 which 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

2. Tax Treatment

3. Tenure

1. Return on Investments

Fixed Deposit

A Fixed Deposit will give a known rate of interest for a known period. So say a 61 days to 90 days fixed deposit in HDFC Bank will fetch you a return of 5% .

Liquid Fund

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 to 7% p.a. For example the DSP ML Liquid Plus Regular Fund has given one year return of 8.67%

2. Tax Treatment

Fixed Deposit

The interest on Fixed deposit is taxed by adding it to 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.

 Liquid Fund

 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.

 

3. Tenure

Fixed Deposit

 You need to know the tenure in advance and need to stick by it to get the desired maturity value. In case you need the money before that you are either penalized or your returns are reduced substantially

 Liquid Fund

 A Liquid Fund has an advantage here since you can redeem your units anytime. Thus giving you  true flexibility.

Conclusion:

 

While the fixed deposit scores in terms of reliability of return .Liquid fund scores on the liquidity, rate of return and tax treatment. Presha Investments recommends liquid funds for those who are income tax assesses & need to park funds for shorter tenures. For known longer time frame use Fixed deposit

 

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