FD vs Recurring Deposit vs Liquid Fund: Detailed Comparision

When it comes to carefully storing your hard-earned money, most of us think of Fixed Deposits (FDs) or Recurring Deposits.

But what if you require flexibility, simple access to your funds, and greater tax efficiency? This is where liquid funds come into play.

Each of these options FD, RD, and Liquid Fund has unique characteristics and perfect applications. 

Understanding the difference is important, whether you're seeking guaranteed returns or a low-risk approach to handle short-term funds. Continue reading to learn key differences of FDs, RDs, and Liquid Funds.

What is Fixed Deposit?

Fixed deposits are deposits in which investors invest a lump sum amount for a fixed period for a set period of time.

Fixed deposit offer guaranteed return. on investment at the fixed rate.

Key Features of FDs

Some of the key features of fixed deposits are mentioned below-

Fixed Tenure:

Fixed deposits have fixed tenure ranging from 7 days to 10 years investors can choose from them as per their requirement. The interest rate remains unchanged over the duration.

Guaranteed Returns:

Fixed deposits offer guaranteed returns as its returns are not directly linked to market and affect by market fluctuations.

FDs have a low to moderate risk because they are not affected by market changes. However, they pose some risks owing to inflation and interest rate changes.

Premature Withdrawal:

While FDs offer stability and certain returns, premature withdrawal may incur penalties or decreased interest rates, affecting overall returns.

Who Should Invest in FD?

• Fixed deposit accounts are a good investment option for individuals who do not want to take any risks. 
• If you want to save your money for the long term while building your wealth with consistent returns, you should consider FD accounts.
• Many retirees who receive a lump payment after retirement might invest their money in FD accounts and use the monthly interest payout to cover costs.
• Individuals can also set away a lump sum for their children or minors to use for future higher education. They can also utilize FD accounts to save for emergencies because they can be withdrawn at any moment with only modest penalties.

What is Recurring Deposit Account?

RD or recurring deposits is a deposit in which investors can invest small monthly amounts. RDs accumulate money without making a big initial commitment.

The principal receives fixed and quarterly compounded interest.

ALSO READ: Check Difference Between Liquid Funds and Fixed Deposits

Features of Recurring Deposit

Some of the key features of recurring deposits are mentioned below-

Regular Monthly Deposits:

MRD offers investors to invest monthly investment of at least ₹500.

Fixed Tenure:

Recurring deposits offers deposits ranging from 6 months to 10 years. This tenure is set at the time of account opening and cannot be changed later on.

Interest Rates:

Like FDs, RD interest rates are determined at account opening and remain consistent throughout the tenure.

Premature withdrawal:

RD allows premature withdrawal but with penalties. The interest rate considered for premature withdrawal may be lower than the original rate.

Nonpayment Penalty:

Late payments may incur fines, and several missed payments may result in premature account termination.

Maturity:

RD offers payment of full amount with the interest earned on it.

Who Should Invest in RD?

• Recurring Deposit (RD) is ideal for individuals who want to build a disciplined savings habit by setting aside a fixed amount every month. 
• It is a great choice for salaried employees, first-time investors, students, and anyone with a regular income who wants to grow their savings without risk. 
• People saving for short-term financial goals like a vacation, gadget purchase, or emergency fund can benefit from the assured returns and low minimum deposit requirement. 
• RDs are also suitable for conservative investors who prefer stable, guaranteed returns over market-linked risks.

What are Liquid Funds?

Liquid Funds are debt mutual fund which offers higher liquidity with lower risks. These are funds which invest money in short-term market securities like treasury bills, commercial papers, etc.

These funds are for a short term ranging from a few days to months. It is designed especially to provide investors easy access to funds with consistent returns.

Key Features of Liquid Funds:

Some of the key features of liquid deposits are mentioned below-

Liquidity: Liquid Funds allow investors to repay their assets rapidly, typically within 24 hours. This feature makes them a good choice for storing excess funds or emergency savings.

Low Risk: Liquid Funds have low risk as it invests in short-term debt securities which have a strong credit rating. This makes them carry reduced risks for investment compared to any market securities.

Stable Returns: While Liquid Funds may not offer particularly large returns, they hope to produce stable and consistent returns over time.

No Lock-In Period: Unlike FDs, Liquid Funds have no lock-in period, allowing investors to withdraw their contributions anytime necessary.

Tax Efficiency: Liquid Fund are tax efficient as returns from these funds are taxed at a very lower rate than FDs.

Who Should Invest in Liquid Funds?

• Liquid funds are perfect if you have excess cash and want to make short-term investments that can yield larger returns than a savings bank or current account.  
• If you're investing through a systematic transfer plan (STP), you can use liquid funds to move money into equity funds.  

Comparing FD vs RD vs Liquid Funds

Returns

• Fixed and recurring deposits offer guaranteed returns whereas liquid funds returns fluctuate depending on market fluctuations 
• Fixed deposits returns are higher than RD because it requires monthly contributions, the returns might differ.

Liquidity

• Fixed deposits are less liquid as they allow premature withdrawal but with a penalty. The funds cannot be accessed before maturity period making them less ideal for emergency situations.
• RDs have similar liquidity difficulties as FDs. Deposits are locked in for the specified time period, and early withdrawals are frequently penalized.
• Liquid funds can be easily redeemed on any business day without any penalty, making them perfect for meeting short-term financial demands or emergency savings.

Risk Profile

• FDs are considered low-risk since they are backed by banks and offer fixed returns. However, they are subject to changes in inflation and interest rates, which may reduce returns over time.
• RDs similar to FDs carry low risk because they are fixed deposits with monthly contributions. RD amount cannot be adjusted once booked which leads to missing out on higher rewards if interest rates rised.
• Liquid Funds are safer but vulnerable to market risk, while they invest in short-term debt instruments, their values can change depending on market conditions making them slightly more volatile than FDs.

Investment Horizon

• FDs are suited for medium to long-term investments. Investors invest for a set period of time that can be anywhere from a few months to several years.
• RDs are intended for long-term disciplined saving and are best suited for individuals who wish to invest a set amount each month.
• Liquid funds are ideal for investors looking to invest for short-term goals or wants to build an emergency fund. They are suitable for storing funds for a few days, weeks, or months not for long-term investments.

Interest Calculation and Payout

• Interest on FDs is calculated on the principle amount from the beginning of the deposit and paid at regular intervals (monthly, quarterly, or yearly) or at maturity, depending on the option selected. 
• In RDs, interest is calculated on the growing sum as each monthly deposit is made. Unlike FDs, interest is not computed on the initial lump sum amount but rather increases with each subsequent payment.
• Liquid funds do not provide regular interest payouts. Instead, they get returns on investments in the fund, which are reinvested. Investors can redeem their units at any time, with the amount received based on the fund's current valuation.

ALSO READ: Check term deposit vs fixed deposit

Conclusion

Fixed Deposits (FDs) and Recurring Deposits (RDs) are both excellent options for safe, fixed returns, but they serve different investing purposes. The choice between these possibilities is determined by the investor's financial objectives, investment horizon, and risk tolerance. For long-term stable returns, FDs and RDs are the best options but Liquid Funds outperform for short-term liquidity and better tax benefits.