When it comes to parking your surplus cash for the short term, two popular options stand out: liquid mutual funds and fixed deposits (FDs). Both offer safety and liquidity, but they work quite differently. Let’s break down what makes each unique and help you decide which fits your needs better.
Fixed Deposits are time-tested banking/NBFC products where you lock in your money for a fixed period at a predetermined interest rate.
Liquid Funds are debt mutual funds that invest in very short-term market instruments like treasury bills, commercial papers, and certificates of deposit with maturities up to 91 days.
Why Choose Liquid Funds?
The biggest draw is flexibility. You can redeem your investment anytime, and most fund houses process redemptions within 24 hour, some even offer instant redemption up to certain limits. There’s no penalty for early withdrawal, unlike FDs. Since these funds invest across various instruments, you also benefit from better portfolio diversification than a single FD.
Why Choose Fixed Deposits?
Guaranteed returns are the cornerstone of FDs. You know exactly what you’ll get at maturity, no market risks, no surprises. This predictability is invaluable for conservative investors or those with specific financial goals. For amounts up to ₹5 lakh, some bank FDs enjoy deposit insurance from the DICGC, adding an extra safety net. Senior citizens get preferential rates, typically 0.25-0.5% higher than regular customers.
Where Liquid Funds Fall Short
The main concern is that returns aren’t guaranteed. While liquid funds are among the safest mutual fund categories, they’re still subject to market risks, however minimal.
The tax treatment means gains are taxed at your income slab, similar to FDs. And unlike the simplicity of FDs, liquid funds require a bit more understanding of how mutual funds work.
Where FDs Disappoint
Premature withdrawal penalties can sting. Break your FD early, and you’ll typically lose 0.5-1% in interest, sometimes more. This rigidity makes FDs unsuitable if you’re unsure about your liquidity needs. Returns often struggle to beat inflation, especially after taxes, meaning your real purchasing power might erode over time.
Choose liquid funds if you value flexibility, need quick access to money, and are comfortable with marginally higher (though not guaranteed) returns. They’re excellent for emergency funds or money you might need within days or weeks.
Opt for FDs if guaranteed returns and capital protection are non-negotiable, or if you have a specific time horizon and won’t need the money before maturity. They’re ideal for conservative investors who prioritize peace of mind over flexibility.
Many savvy investors actually use both, liquid funds for ultra-short-term needs and emergency funds, and FDs for slightly longer commitments where guaranteed returns matter. It’s not about choosing one over the other, it’s about using each where they shine brightest.
At Upstox, we ensure all the options for FDs and liquid MFs are available to our investors. What is your safe investment strategy?