A  Comparative Analysis of Liquid Fund and FD

A  Comparative Analysis of Liquid Fund and FD

We all have some financial goals in our life.

Some of us endeavour to attain the financial stability and some wish to quickly maximize their wealth.

People consider investment as the best option for accruing such incomes. However, not everyone is pleased with the idea of investment.

The reason is that people think investments have to be made in stock market which carry lots of risk.

Well, that is half-truth. A person with low-risk appetite do not need to turn towards market volatiles.

There are other investing instruments such as Fixed Deposit and Liquid Fund as well.

These are the safest medium of investment with good returns.



Fixed Deposit

Fixed Deposit is an investment instrument which is used to store money and earn guaranteed returns on them.

An FD is a prominent vehicle of investment in India. People prefer FD to other tools because it is a much safer way of growing money.

A person can submit a lump sump amount in this account and earn fixed interest over the period of tenure.

This tenure is decided by the investor. A person can have a maturity period of 7 days to as long as 10 years.

FD can also be used as a mode of tax deduction. After investing in FD for at least 5 years, you can show your annual investment and get a return of 1.5 lakh on income tax.

Liquid Fund

People are well aware of the term FD. However, only a little number of people know about the term Liquid Fund.

LF is a debt fund that uses instruments such as treasury bills, commercial papers and certificate of deposit as a mode of investment.

If you have a sum of money parked idly in your saving account, and you don’t plan to make any use of it as for now, you should consider investing it in the liquidity fund.

LF offers higher interset rate on the amount than savings account. Also, it has a maximum maturity period of 91 days.

Therefore, if you are planning on quickly maximizing your wealth, a liquid fund is an ideal option for you.

Since LF is linked with the market, fluctuations can affect the interest rate and your money is exposed to some risk as well.

However, many people consider liquid fund as a gateway to investing in equity shares. LF is basically a mini version of investing in stocks but with lesser risk and short maturity.

Also Read – Complete Guide of Demat Account and Trading Account

Liquid Fund vs Fixed Deposit

Both LF and FD have features worth considering investment into.

Here are 4 points of comparison:

Investment

In an FD account, you deposit a lump sump amount at a time. Thereafter, you will receive interest on the amount until the day of maturity ranging from 7 days to 10 years.

Liquid Fund allows you to invest in the debt fund for the period of 91 days. The interest rate depends on the fluctuating market.

Interest

Interest rate on FD can vary anywhere near 2% to 7% depending on the bank.

These are the fixed rate that the investor receives. Market fluctuations have no effect on such interest rates.

On the other hand, LF do not have a fixed interest rate.

Since, liquid funds are linked to stock market, bearish or bullish period have impact on such interest rate.

However, the liquid fund’s interests are still higher than that of FD.

Risk

Fixed Deposits are completely safe from any risk factor. In fact, the government promises an insurance of 1 lakh over FD.

Liquid Funds are risk-prone. People investing in LF invest in the market. Therefore, any volatility in NAV can have an impact on it. Yet, LF are not as risky as other investing vehicles.

Liquidity

It is not permissible for a person to withdraw his/ her FD money before the maturation period.

However, if the person still wishes to withdraw the amount, a penalty is a charge upon the transaction.

It is easy to exit the liquid fund at any time of the tenure.

You can withdraw the amount anytime even before the maturity period. You will receive the amount within 24 hours of exit.

Though the SEBI has made some regulations now. Withdrawing under 7 days of enter period can charge you some exit loads.

The Bottom Line

Investing your money in other tools than just savings  account can help you grow your wealth.

This can even help you to adopt a saving habit.

Both FD and Liquid Fund are able choice for the cause.

If you wish to engage your money for short-term, LF is the best option for you. But, if you want to invest money and earn returns for a good time, FD is the right option for you.

Likewise, analyse your preferences and make wise investment.



Team R Wealth

Team R Wealth

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