Tax friendly
With fixed deposits, you have to pay tax on the interest every year.
But with liquid funds, you don’t pay any tax until you withdraw the money.
Moreover, if you keep the money invested for more than three years, you can lower your taxes. First, you get the benefit of “indexation”: the invested amount is adjusted for inflation before calculating the gain. And then these adjusted gains are taxed at 20%.
Partial & early withdrawal
With a regular fixed deposit, if you need the money, you need to break the entire deposit. But with liquid funds, you can withdraw just as much as you need and leave the rest invested.
Moreover, fixed deposits are “fixed” for a specific period. If you break them earlier than maturity date, you may have to incur a lower rate and a penalty fee.
With liquid funds, you can withdraw anytime you like. And typically after the first seven days of investment, no exit charge.
Diversification
With a fixed deposit, your risk is entirely on the bank. But a liquid fund diversifies the risk by investing your money across a large number of investments. Some liquid funds also invest the money in short term government bonds (called Treasury Bills).
On the other hand
Unlike a fixed deposit, a liquid fund cannot tell you what return you will receive at maturity. But if you ask for the fund’s Yield To Maturity, that is a reasonable indicator of the return you can expect.
The other problems with liquid funds are choosing the right fund and keeping tracking of their performance.
We can help
If you would like to invest in liquid funds, we can help. We will help you identify the right fund and we’ll keep track of it for you.
DIY
If you would like to invest directly, you can do so with the asset management companies that manage the liquid funds. Here is a list of these companies.
Or, if you prefer, there are several websites and apps that you can use (in alphabetical order): Coin by Zerodha, ETMoney, Fisdom, FundsIndia, FundsInn, Groww, INDwealth, Invezta, Jama, Kuvera, MobiKwik, NiyoMoney, Orowealth, PaytmMoney, Piggy, RupeeVest, Scripbox, Upwardly, WealthTrust, Wealthy.
Good luck!
*Note: You can also invest in fixed deposits with companies. Those are riskier than bank fixed deposits. In this article, I am talking only about fixed deposits.
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