Which is preferable: bank fixed deposits or liquid funds?

After the RBI raised the repo rate by 50 basis points for the third time, numerous banks raised fixed deposit interest rates (FDs). Since May, the RBI has raised its repo rate 190 basis points to 5.9%. SBI, India’s largest state-run lender, hiked interest rates for loans under Rs 2 crore on October 22. HDFC and ICICI banks boosted term deposit rates.

Should you invest in FDs as interest rates rise? Experts say FD interest rates cannot beat inflation. Liquid finances for investing? FDs and liquid funds confuse investors.

Liquid funds, What are they?

Liquid funds hold treasury bills, commercial paper, government securities, bonds, and debentures with 91-day or three-month maturities.

Liquid funds have no lock-in, according to Proficient Equities Private Limited founder and director Manoj Dalmia.

He stated that capital gains are taxed when investors redeem liquid fund units for more than they purchased for them due to short- and long-term capital gains taxes and indexation benefits.

FDs—what are they?

Fixed deposits can be held for 7 to 10 years, but their short-term returns are similar to savings accounts.

“It is crucial to note that in bank fixed deposits, your assets are locked in for the time specified, and early withdrawals are only authorised with a penalty.” This reduces interest income and makes fixed deposits unsuitable for emergencies,” Manoj Dalmia said.

Liquid funds vs. fixed deposits

Manoj Dalmia thinks liquid funds and bank FDs can park short-term surpluses and yield moderate returns with low risk. Liquid funds are useful for hesitant redeemers.