Feb 12, 2018 05:06 PM IST | Source:

Fixed deposits or Liquid funds: Where to park your surplus for steady returns

If you need liquidity along with steady returns, short-term liquid funds could be a good option, though returns are not guaranteed as in FDs.

Navneet Dubey @navneetdubey91

It’s always nice to have a bit of spare money with you at the end of the month, even if it is not a lot. However, have you given a thought on what do with those extra savings left in your bank account? Keeping it lying idle is not the best thing to do. The money needs to be invested so that it grows. That little spare money can eventually lead to a lot of wealth creation if invested wisely.

However, if you are a risk-averse investor, two of the main choices to park your money is bank fixed deposits (FDs) and liquid mutual funds. If you are choosing between the two, you should understand which one suits your financial requirement. Fixed deposits are offered by commercial banks, including small finance banks. On the other hand, if you need liquidity along with steady returns, short-term liquid funds could be a good option which might give you slightly higher returns, though not guaranteed as in FDs.

 Adhil Shetty, CEO – says whether it is an FD or liquid funds, investing your surplus is always a good idea. “From fixed deposits to liquid mutual funds, you can choose whatever saving scheme that works best for you. A small amount can go a long way if invested regularly and in the right way,” he said.

Here are some salient features of FDs and liquid funds that can help you decide your investment.

 Fixed Deposits

FDs, which are also termed called term deposits, is one of the most common and preferred investment avenues for many.  Besides earning interest you can get a tax benefit if it is kept for 5 years or more. “Fixed deposits are a handy way to make sure we earn that little bit extra instead of leaving the money lying around in a savings account,” said Kunal Bajaj is CEO & founder of

Here are some features of FDs you should know:

=> The bank will inform you the rate of interest you will earn on the FD
=> You need to select the duration of the FD before you start
=> Most banks offer durations of as little as 7 days and up to 5 years.
=> There may be penalties if you break your FD before the deposit tenure opted for.
=> TDS will be applicable if interest income exceeds Rs 10000 in a particular financial year
=> Your bank may deduct TDS before paying out any interest due to you on the FD. However, if the TDS rate is lower than your personal tax rate, you are liable to pay interest on the FD when you file your tax returns.

=> Currently, the best FDs are providing returns between 7 to 9% p.a

If you’re over 60 years of age, you should ask your bank for any preferred rate available to ‘Senior Citizens’ because senior citizens generally get a higher interest rate on FDs.

FDs are one of the safest investment options. “The Deposit Insurance and Credit Guarantee Corporation (DICGC) automatically insures you up to Rs 1 lakh per customer across all branches of the same bank. But this overall limit applies to all your balances with the bank – savings accounts, current accounts, as well as Fixed Deposits,” said Bajaj.

Liquid Funds

For financial security, you should always save 3 to 6 months of the deposits in a bank account or in liquid funds as emergency funds. If you’re thinking of parking your money for the short term, you can also consider liquid mutual funds. Liquid funds are an ideal alternative to fixed deposits because that they invest in low-risk debt and money market securities. The income earned by the mutual fund is then passed on to the investors in that mutual fund.

Here are some features of liquid funds you should know:

These are debt mutual funds with no lock-in period.
=> The money is invested in money market instruments like a certificate of deposits, treasury bills, commercial papers and term deposits.
=> The underlying assets have low maturity period and provide you low-interest rates.
=> You can enter and exit from the scheme anytime. Moreover, funds have no entry load and exit loads
=> Most of the time you may also get returns higher than bank savings account, though are not guaranteed

=> Currently, best liquid funds are providing returns between 8 to 10% p.a

Liquid Funds do not provide any guaranteed returns, however, a well-run liquid fund is generally considered as safe as fixed deposit and generally beat the interest rate earned on FDs of similar duration.

“You have the flexibility to redeem your money within just one working day with no penalties for early withdrawal, and the convenience of switching your money into other mutual funds as and when you feel like,” said Bajaj.
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