Liquid Funds vs Fixed Deposit: Which is Better for You?

The main difference between fixed deposits and liquid funds is due to their market exposure and nature. Fixed deposits are safe investments without market exposure and moderate returns. However, liquid funds are mutual fund schemes that pool investments to invest in money market security with short liquidity.

The debate of FD vs liquid fund can be addressed by analysing these investment instruments and their difference in detail. Moreover, no one investment strategy can suit every investor. Therefore, analysing them in line with personal investment objectives is necessary.

Liquid Funds

Mutual fund schemes pooling investments to invest in instruments with high liquidity, maturity of nearly up to 3 months are known as liquid funds. They invest mainly in certificates of deposits, treasury bills, t-bills repurchase agreements (TREPs), etc. They offer returns above regular savings accounts due to their market exposure. As of November 2024 data, on average 7.28% annual returns were generated by the liquid funds.

Before selecting the most suitable investment of FD vs liquid fund, investors should also understand the features of FDs.

Fixed Deposits (FDs)

The type of term deposit accounts that generate fixed returns based on interest after the pre-determined maturity is known as fixed deposits. They have a fixed maturity duration from How Budget Provisions Impact Energy Sector Stocks7 days to 10 years and generate moderate returns, higher than other accounts such as savings, recurring, etc.

The debate of liquid fund vs FD can be decoded by analysing the difference between these instruments and checking their viability in the market.

Difference Between Liquid Fund vs FD

Investors can analyse this detailed differentiation between the two investment assets: 

Point of Difference	Liquid Funds	Fixed Deposits
Meaning	These are mutual funds that invest specifically in the money market instruments.	These are accounts that serve capital protection without any market exposure and generate a fixed interest rate at a specific maturity.
Returns	They generate moderate to high returns compared to regular savings accounts.	They generate moderate returns, higher than other accounts but lower than the assets with market exposure.
Tenure	These are short-term investments which span from 1 day to 3 months.	FDs are long-term investments and the tenure can be 7 days to 10 years.
Taxation	These funds are categorised under the Specified Mutual Funds. Therefore, they will be taxed as per the investor’s income tax slab rate.	Other than 5-year tax-saving FDs, all are taxed per the income tax slab. The tax-saving FDs can be claimed as deduction.
Risks	Market, interest rate and credit risks may affect these funds.	Inflation risk can potentially affect the returns.
Suitability	Investors with potential risk appetite and short-term requirements may find liquid funds suitable.	Investors willing to protect their capital for the long term and have low-risk tolerance may find FDs suitable.

No one strategy can suit every type of investor to select between the FD vs liquid fund. Therefore, analysing factors like risk tolerance, requirement of funds, tenure, investment objective, existing portfolio, etc., can help investors determine their suitability.

Conclusion

Liquid fund vs FD can be differentiated based on their risks, market exposure, tenure, taxation and suitability. Liquid funds can provide debt market exposure along with potential risk and moderate to high returns. However, FDs can provide the required capital protection for a long term. Investors can analyse their existing portfolio and investment objective to decide their suitable investment between FD vs liquid fund.Stay updated with information regarding financial concepts and updates. Log in to PowerUp Money or download their financial planning app.