Liquid Funds vs. Fixed Deposits

When it comes to investing your hard-earned money, all investors/depositors must explore various options to make an informed decision.  In this regard, the two popular investment options that often come into consideration are liquid funds and fixed deposits. While both provide secured returns on your investment, they differ in terms of liquidity and the degree of potential risk involved. This article focuses on the comparison of liquid funds vs fixed deposits and their benefits, guiding you on how to choose the right investment plan based on your financial goals.

What are Liquid Funds?

A type of mutual fund, liquid funds primarily invest in short-term debt instruments or fixed-income securities such as treasury bills, certificates of deposit and commercial papers. These funds are designed to provide investors with high liquidity and stability, making them ideal for parking surplus funds or meeting short-term financial requirements.

What are Fixed Deposits?

Fixed deposits are a type of investment instrument where an individual can deposit a lump sum amount for a specified period while earning a fixed income in return. In this plan, the sum of money remains locked until maturity, providing a predetermined return on investment. 

Liquid Funds vs Fixed Deposits

Let’s look at the comparative overview of liquid funds vs FD before diving into more details about the two. 

ComparisonLiquid FundsFixed Deposits
LiquidityHigh liquidity allows for easy withdrawal of investmentLower liquidity, not allowing withdrawal till a specified tenure 
ReturnsProvides higher returns than savings account interest income Guaranteed returns with predetermined interest rates
RiskRelatively low risk, subject to market risksGenerally safe, but may get affected by inflation and rates
Investment HorizonSuitable for short-term goalsSuitable for long-term goals
Risk ToleranceModerate risk, suitable for investors with moderate riskLow risk, suitable for risk-averse investors
Professional ManagementManaged by experienced fund managersNo professional management is required, an investor takes ownership
FlexibilityFlexible redemption and investment optionsFixed tenure with limited flexibility
DiversificationThe deposit amount is invested in a range of debt instruments for risk diversificationNo diversification, the deposit amount is invested in an FD scheme itself
Interest RateInterest rates are subject to frequent change during an investment tenure Fixed interest rate throughout the tenure

Benefits of Liquid Funds

To decide whether liquid funds are the right plan of investment for you, you need to first walk through some of its common benefits. 

1. Liquidity

Liquid funds offer flexible liquidity options, allowing investors/depositors to easily withdraw their deposits and encash their funds within a couple of days.  With flexible liquidity options, depositors can conveniently withdraw their investments for emergencies or unexpected financial needs.

2. Higher Returns than Savings Accounts

Unlike traditional savings accounts, liquid funds tend to generate comparatively better returns. While the returns earned from this type of mutual fund are not as high as those from equity or long-term debt funds, they generally outperform savings accounts, making them suitable for investors seeking relatively stable income.

3. Diversification

Liquid funds provide diversification by investing in a range of debt instruments issued by various entities. This diversification helps in spreading the risk associated with investing in a single security, thus enhancing the stability of the investment.

4. Professional Management

Liquid funds are managed by expert fund managers who monitor interest rate movements, analyse market conditions and make informed investment decisions on behalf of the investors. These professional managers ensure that the fund aligns with the prevailing market trends, enabling you to earn maximised returns.

5. Risks Associated with Liquid Funds

Although a low-risk investment option, it is still important to take into account whatever potential risk is underlying while making a decision. The primary risks associated with liquid funds include liquidity, credit, and interest rate risks. However, these risks are generally lower compared to other investment options, such as equity funds.

Benefits of Fixed Deposits

Now let’s take a look at some of the benefits you can avail by investing in fixed deposits. 

1. Guaranteed Returns

Fixed deposits offer guaranteed returns, ensuring that the principal amount you invest remains safe and earns interest over the predetermined tenure. This stability makes fixed deposits highly popular among risk-averse investors who prioritise capital preservation.

2. Flexibility in Tenure

Fixed deposits provide flexible tenure options, allowing investors to align their investment plans with their future requirements. Investors can opt for short-term deposits ranging from a few months to a year or long-term deposits extending several years. 

3. Tax Benefits

A fixed deposit is an ideal tax-saving investment option. By investing in fixed deposits, depositors can avail tax exemptions or reduce their taxable income. Unlike other types of investments, major banks and financial institutions in India do not charge taxes on the interest income earned from fixed deposits till a certain limit. 

4. Easy Reinvestment

After the maturity period of an FD investment, an individual can either choose to encash their deposit or reinvest the deposit for the same tenure. Most fixed deposit schemes are designed with auto-renewal modes, allowing depositors to easily reinvest without any manual intervention and loss of interest income. 

5. Risks Associated with Fixed Deposits

While fixed deposits are generally considered safe, there are a few risks to be aware of. The main risk is inflation risk, as the returns from fixed deposits may not keep pace with inflation. Additionally, most banks charge a penalty for premature withdrawals of fixed deposits leading to a lower-than-expected return on FD investment.

5 Best Liquid Funds in India

Here is a list of India’s top 5 liquid funds, along with a breakdown of return rates applicable for different periods. 

Liquid Fund NameReturn Rate (1 Year)Return Rate (3 Years)Return Rate (5 Years)
Mahindra Manulife Liquid Fund Direct Plan-Growth6.89%4.77%5.9%
Aditya Birla Sun Life Liquid Fund Direct Plan-Growth6.91%4.74%5.36%
Baroda BNP Paribas Liquid Fund Direct-Growth Option6.87%4.76%5.33%
Union Liquid Fund Direct Plan Growth Option6.88%4.73%4.55% 
PGIM India Liquid Fund Direct Plan-Growth6.88%4.73%5.35%

5 Best Fixed Deposits in India

Here is a list of the top 5 fixed deposit schemes offered by major banks and financial institutions in India, along with the current applicable interest rate of each. 

FD Name General Citizen Rates Senior Citizen Rate 
State Bank of India 3.00% to 7.00%3.50% to 7.50% 
RBL Bank 3.50% to 7.80%4.00% to 8.30%
Fincare Small Finance Bank3.00% to 8.31% 3.60% to 9.11% 
Punjab National Bank3.50% to 7.25%4.00% to 7.75%
AXIS Bank 3.00% to 7.10% 3.50% to 7.75% 

Liquid Funds vs Fixed Deposits – Tax Implications

When it comes to differentiating FD vs liquid funds, the tax implications of the two become a major factor. Let’s discuss in detail how the tax implication of FD differs from liquid funds. 

As mentioned earlier, depositors can avail of tax exemptions by investing in a fixed deposit scheme but only to a certain limit. According to the Income Tax Act 1961, a depositor is liable to pay tax on their interest income earned from FD investment if its aggregate amount exceeds ₹40,000 in a financial year. Moreover, depositors need to hold a valid PAN Card number to avoid taxation on FD investment at a rate of 20%. 

In contrast, all returns earned from an investment in liquid funds for more than 3 years are subject to taxation under Long Term Capital Gains. However, liquid fund investment held for a shorter tenure than 3 years is taxed as per the applicable slab under Short Term Capital Gains. 


Hopefully, now you clearly understand the two investment options and compare liquid funds vs fixed deposits before making a decision. Depositors must also review the associated terms and conditions of the two and assess their priorities, such as financial goals, time horizon, and risk tolerance.


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