When it comes to investing your hard-earned money, safety, and steady returns become a top priority. This is the primary reason fixed deposits (FDs) have been a part of every Indian household since decades. Especially, if one is not too keen on being an adventurous investor, FDs can be an ideal go-to investment as they assure a fixed interest rate.
However, interest rates on FDs have been on a gradual decline over the past few years, and hence, people are beginning to explore other investment options. After all, it makes sense to invest idle cash in an investment tool that can maximise your wealth.
This is where you can consider liquid funds. Here, you may want to know what is liquid fund.
Liquid funds meaning
Liquid funds invest in low-risk debt and money-market securities such as treasury bills, certificate of deposits and commercial papers. The income from these securities (gains on market price or accumulated interest) is passed on to the investors through a daily Net Asset Value (NAV) of units. These units can be bought and redeemed whenever appropriate. If you are wondering how to invest in liquid funds, you can do it by yourself online, or approach a fund manager to purchase liquid funds offline and allow them to manage your portfolio.
Features of liquid funds compared with FDs
Here is why liquid funds are a better alternative than FDs:
- Lock-in period
FDs come with a mandatory lock-in period. It can be as little as seven days and can go up to 5 years. There can be penalties if you break an FD before the tenure is completed.
On the other hand, liquid funds do not have mandatory lock-in period. You can enter and exit from a scheme anytime. Moreover, most funds do not have entry and exit load.
Since FDs have a mandatory lock-in period, they are less liquid. In the case of liquid funds, you can redeem your units any day you want and get the money credited in your account on the same day.
- Tax treatment
Taxation is a significant factor on which most investors weigh their investment options. In the case of FDs, the tax is levied as per the income tax slab of the investor. So, if you fall in the 30% tax bracket, the interest income on FDs would be added to your total income and taxed at 30%.
On the other hand, tax on liquid funds is lower as compared to tax on FDs. If you hold them for more than three years, you are eligible for long-term capital gain tax at 20% with indexation benefit. If you keep them for less than three years, you pay tax as per your income slab. If you opt for the dividend option, the dividend income is free, subject to a dividend distribution tax of 29.12%.
To sum up, liquid fund returns are typically higher when compared to fixed deposits as they invest in low-risk debt and securities. Plus, short term liquid funds are an extremely flexible investment option for those who wish to redeem their returns whenever they please.