An investor can invest in a fixed deposit (FD) for seven days to ten years.
For risk-averse investors, fixed deposits (FDs) have long been considered a secure haven. The appeal lies in the fixed returns that, once determined at the outset, remain constant throughout the investment tenure. Unlike market-driven investments vulnerable to fluctuations, FDs ensure that investors receive the initially committed interest, even if broader interest rates dip post-initial investment. This predictability makes FDs a preferred choice among the Indian populace. However, there’s an alternative in the financial landscape that promises lower risk coupled with potentially higher rewards—Liquid Funds.
When choosing between FDs and Liquid Funds, investors must weigh the merits and demerits of each, aligning with their risk appetite and investment goals.
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Fixed Deposits (FDs):
Investors can opt for FDs with tenures ranging from seven days to a decade, making it a versatile investment tool. Offering a secure avenue with guaranteed profits, FDs are often considered superior for long-term investments. However, the flaw lies in the predetermined lock-in period; premature withdrawals incur penalties, impacting interest earnings.
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Liquid Funds:
Liquid Funds allocate funds to fixed-income instruments such as Treasury bills, bonds, commercial paper, and government securities. These funds stand out for their flexibility, as they invest in securities with maturities of up to 91 days or 3 months. Treasury bills, commercial papers, government securities, bonds, and debentures are typical constituents. The defining feature of liquid funds is the investor’s ability to redeem investments at any time without incurring penalties. While they attract both short-term and long-term capital gains taxes, their liquidity sets them apart.
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Both Bank FDs and Liquid Funds provide guaranteed returns with relatively lower risk. However, the key distinction lies in withdrawal mechanisms. Liquid Funds grant investors the freedom to withdraw without penalties after seven days, a flexibility lacking in FDs. On the flip side, FDs may have a longer lock-in period with withdrawal penalties, but they often boast a track record of stability. The choice between the two hinges on an investor’s risk tolerance, financial goals, and the need for liquidity.
