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Why Liquid Funds Can Be a Better Investment Option Than Bank FDs

Adhil Shetty
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Q: Are liquid funds a better investment option than bank FDs? — Malvika

A:  Liquid funds are mutual fund products that invest the corpus in money market instruments to generate returns. They don’t have any lock-in period or restrictions on entry and exit. Therefore, you can get the redemption within 24 hours of putting a request.

The risk, too, is low with liquid funds as the corpus is invested in fixed-income instruments with low maturity periods. The track record of liquid funds suggests that their returns are usually close to bank FDs and, in some cases, even higher.

However, the most important advantage that liquid funds have over FDs is the flexibility to invest and withdraw without any charges. Also, since liquid funds are debt mutual funds, you get indexation benefit on Long Term Capital Gains after three years of investment, which makes liquid funds more tax-efficient than FDs where returns are fully taxable.

People who fall in the highest tax bracket get more benefits with liquid funds. Interest on FDs are subject to the Tax Deducted at Source (TDS) and is taxed in accordance with the applicable slab rate of the individual.

So, if you often get large sums for short durations, then a liquid fund can give you better investment opportunity in comparison to an FD. And even for long duration, you can get better tax-adjusted returns with liquid funds.

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