Liquid Funds

According To An Investor, Which Scheme Is Better To Invest FD Or Liquid Funds?

You should go to a liquid fund or FD- A fixed deposit (FD) is the safest investment option, where at the end of the term, you can save your hard-earned money at a higher interest rate and get more.

A liquid fund is a debt mutual fund scheme. If you have some extra money and invest a lump sum for some time, then put your money in a liquid fund and enroll for a systematic transfer scheme (STP).

There is no risk that you will lose your money in FD. However, the risk factor is always associated with it in liquid funds. A liquid fund has the lowest risk in other debt funds but is still riskier than an FD.

The income earned in liquid funds is the recurring net asset value (NAV) in the form of accumulated interest received by investors. FD customers pay interest at maturity and a fixed income at a fixed interest rate.

A liquid fund NAV has a daily price adjustment due to the underlying assets. Therefore, it is risky. But, in FD, there are no underlying securities involved, so there was no loss. 

Some facts to be considered, when you invest in liquid funds

  • In the long term, liquid funds are tax-efficient.
  • There are many products available and you can invest according to your goal.
  • You can invest in various products where you can make more money than FD.
  • You can diversify your portfolio and get higher yields.
  • You can invest in arbitrage funds, which are treated as equity funds for one year.
  • Equity saving funds is a good investment option for 1 to 3 years.
  • Liquid funds have higher post-tax returns than FDs.
  • You can park your money in different funds, so the risk is reduced. 

Why should you go for the liquid fund?

A liquid fund is a form of debt fund whose primary investment area is money market instruments — certificates of deposit, treasury bills, commercial papers and term deposits. Due to the short maturity period of these underlying assets (with the investment period being less than 24 hours), it is easy for the fund manager to meet the redemption demand of his investors. Therefore, the option of liquid funds gives companies and individuals a golden opportunity to lodge their surplus cash for a concise period of time. Another advantage is that the returns on these funds are lower, relative to other investments.

  • Why should you go for liquid funds?
  • There is no lock-in period.
  • You can remove it at any time.
  • It has zero exit loads.
  • Invest in a direct plan to reduce the expense ratio. 

Some of the most popular liquid funds:

  • Axis Liquid Fund
  • Birla Sun Life Cash Plus
  • HDFC Cash Management
  • INVESCO India Liquid Fund

All the above schemes have a 1-year return of over 7%.

Note: If your investment is more than 1lakh and the lock-in period is more than a year, then go for liquid funds, because liquid funds can give you additional funds for compounding.

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