The investment landscape has evolved. Earlier, individuals invested primarily with a contingency fund creation in mind. However, today the focus has shifted toward wealth creation, tax savings, and other areas. The same principle applies to investment options.
Before, limited investment options were available. Now, several investment options are available for all types of investors. Fixed Deposit (FD) and Liquid Assets are two popular options which are often compared to each other. This is because they tend to attract similar types of investors.
This blog explains the difference between the two investment options and highlights the ideal investor profile for each.
Difference Between the Fixed Deposit and The Liquid Asset:
1. Concept
Fixed Deposit:
A Fixed Deposit requires you to invest a significant sum for a fixed tenure. You will periodically earn a competitive interest rate on the deposit for the opted tenure.
Liquid Assets:
Liquid Assets, also known as Liquid Funds, are a kind of Mutual Fund which invests in Debt instruments. This includes Treasury Bills, Corporate Bonds, Commercial papers, and more.
2. Investment place
Fixed Deposit:
FD is a common investment instrument offered by all Indian banks and Non-Banking Financial Companies (NBFCs). You can invest with any one of them.
Liquid Assets:
You can invest in Liquid Assets through an online stockbroker platform or a Mutual Fund house. Your purchase is completed as soon as the marketplace fulfils your order.
3. Mode of investment:
Fixed Deposit:
You can invest in an FD by investing a lump sum amount. Choose an investment amount within the FD limits framed by the bank.
Liquid Assets:
You can invest in an FD via the Systematic Investment Plan (SIP) or the lumpsum investment method. You can invest any amount above the minimum investment amount.
4. Tenure of investment:
Fixed Deposit:
You can decide the FD tenure. The tenure range is 7 days to 10 years.
Liquid Assets:
All Debt instruments have a fixed tenure. The tenure range is from 1 day to 91 days.
5. Returns and risk:
Fixed Deposit:
FD’s returns are predictable, as it’s based on an interest rate. Furthermore, senior citizens are in a position to earn better interest due to the senior citizen FD rates. It is classified as a low-risk investment option.
Liquid Assets:
Liquid Assets are tied to the markets. So, their returns and risk depend on the market situation. This provides a chance to earn competitive earnings by taking on some risk.
6. Taxation:
Fixed Deposit:
FD interest earnings are taxed as per the applicable tax slab. The senior citizen investors tend to enjoy tax relief here. Moreover, the tax-saving FD is available to all investors. It allows deductions under Section 80C.
Liquid Assets:
The capital gain tax applies to the Liquid Asset returns. Short-term or long-term capital gain tax applies to the returns depending on the tenure. So, careful consideration is necessary for effective financial planning.
Ideal investor profile for Fixed Deposits and Liquid Assets:
Fixed Deposit:
You may be an ideal investor for a Fixed Deposit if you:
- You have a lump sum at your disposal for the investment.
- You are comfortable with zero liquidity during the tenure.
- You prefer modest returns.
- You have low-risk tolerance.
Liquid Assets:
If you meet the following criteria, you may be an ideal investor for Liquid Assets:
- You prefer investments that offer instant liquidity.
- You aim to earn competitive returns.
- You have a low to moderate risk tolerance.
Summing It Up:
Fixed Deposits and Liquid Assets are two popular investment options that low- to moderate-risk-tolerance investors consider. This enables you to earn competitive interest rates that are higher than those of a simple bank account savings. This grows your money steadily.
You can invest in either option based on your investor profile and financial goals. You can make the investment offline or online. This allows you to closely monitor your investment portfolio.