Investors look for safety when it comes to money. It is the first thing they look for in an investment. Based on the amount of risk that investors are willing to take, they are divided into three types:
Although there are a wide variety of investment options available, all three types of investors have Fixed Deposits in their portfolio. This is because Fixed Deposits are less risky and give guaranteed returns. Even a layman is well aware of Fixed Deposits. If only the average investors knew about Liquid Funds, they would be in a better position to evaluate all the investment options available to them. As you read on, you will learn about fixed deposits and liquid funds and be in a better position to decide which alternative suits you best.
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What is a Fixed Deposit?
The term "fixed" in Fixed Deposits denotes the period of maturity or tenure or term. Fixed Deposits are also known as Term Deposits or FDs. In a Fixed Deposit, money is deposited in the bank for a specified term. The bank pays an interest that is fixed till maturity.
An FD cannot be withdrawn before the fixed time period. In case of an emergency, you can make a premature withdrawal or break your Fixed Deposits by paying a penalty. You will be given 1% less interest on premature withdrawal.
A liquid fund is a type of mutual fund. Liquid funds invest in different money market instruments like treasury bills, corporate papers, certificates of deposits and so on.
See Also: How to Invest in Liquid Funds?
FDs and liquid funds differ in returns, safety and liquidity.
1. Fixed Deposits earn an attractive rate of interest which currently ranges from 6-7% a year. Plus, it is guaranteed. Liquid Funds, on the other hand earn the lowest interest rate among debt funds. This is because they are invested in fixed income securities with maturity of a maximum of 91 days.
2. Premature withdrawal on a Fixed Deposit attracts a penalty. You get 1% less interest, than what you should have actually received on maturity. Liquid Funds on the other hand, can be bought and sold on a daily basis. This is why liquid funds have no exit load.
3. The returns on a Fixed Deposit are fixed and guaranteed. This is because you are aware of the term and rate of interest and Fixed Deposits are not linked to the market, unlike ULIPs. The returns on Liquid Funds are not fixed. This is because Liquid Funds are linked to the market. The Net Asset Value (NAV) of Liquid Funds depends upon the daily price movement of the underlying Money Market instruments.
4. Fixed Deposits have a lock-in period and this makes them illiquid. Liquid Funds are highly liquid. You can redeem the Liquid Fund Units and get your money within a single working day.
5. Fixed Deposits are ideal if you want to invest your money for the long-term. Liquid funds contrastingly, are ideal for very short-term investments.
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