Liquid mutual funds are great for retail investors. They provide superior returns. They are convenient, affordable, highly liquid etc.

But even today, majority of investors prefer other investment options over liquid funds like bank fixed deposits, savings account, debt funds etc.

Liquid Mutual Funds Vs other Investment Options

So, which is better? Liquid Mutual Funds or other investment options?

To make an informed decision, you must first evaluate liquid mutual funds vs other investment options.

Liquid Mutual Funds Vs Fixed Deposits (FD) – Meaning

What is a Liquid Fund?

A liquid mutual fund is an open-ended debt fund. It invests in fixed income papers issued by private, public companies and the government. Liquid funds only invest in papers having a maturity of 91 days or lower.

Liquid mutual funds typically invest in:

  • Treasury bills (T-Bills) issued by the government
  • Certificate of Deposits (CDs) issued by private and public companies.

These papers carry high credit rating and hence are extremely safe. But liquid funds are linked to the market and do carry market risk.

What is a Fixed Deposit?

A fixed deposit is a facility offered by banks and Non-Banking Financial Companies (NBFCs). Under a fixed deposit, investors deposit a lump sum amount which is locked-in for a fixed period of time at a fixed rate of interest.

The tenure and interest rate are decided at the time of making the fixed deposits. Depositors can choose between receiving interest on maturity or on a periodic basis.

Bank Fixed deposits are considered to be extremely safe as they are insured under the ‘Deposit Insurance & Credit Guarantee Corporation’ scheme up to Rs 5 Lakhs.

Liquid Mutual Funds Vs Fixed Deposit – Which is Better?

Parameters Liquid Mutual Funds Bank Fixed Deposits
Returns 1% - 2% higher than bank FDs Lower than liquid mutual funds
Market Linked returns Returns are linked to the market and not guaranteed Returns are fixed, guaranteed and not linked to the market.
Risk Medium Low
Premature Withdrawal Allowed and no exit load after 7 days Allowed but with high penalty (up to 1% of the deposit)
Taxation 20% with Indexation TDS deducted plus tax as per tax slab
Minimum Investment Low Very High

As you can see, liquid funds are superior than bank fixed deposits.

Liquid Mutual Funds Vs Debt Mutual Funds

Investors are often confused about the difference between liquid mutual funds and debt funds. Liquid mutual funds are a type of debt funds. But the universe of debt funds is vast.

Debt funds invests in various fixed income instruments like:

  • Treasury Bills
  • Corporate Bonds
  • Government Securities
  • Commercial Papers
  • Certificates of Deposits

Debt funds are considered to be fairly safe as they invest in ‘fixed income’ instruments. But different types of debt funds carry different risks.

Liquid funds are very safe. But credit risk debt funds are extremely risky. Gilt funds carry zero default risk but high interest risk etc.

The main difference between liquid funds and debt funds lies in the maturity tenure of the papers. Liquid funds cannot invest in papers with maturity of more than 91 days.

Debt mutual funds can invest in papers maturing within days (overnight funds) to years (10-year constant gilt funds). Hence, debt funds are perfect for all types of risk profiles – low, medium and high.

Liquid Mutual Funds Vs Debt Funds – Which is Better?

Parameters Liquid Mutual Funds Debt Funds
Risk Lower than debt funds Higher than liquid funds but lower than equity funds.
Returns Lower than debt funds Higher than liquid funds
Liquidity Highly liquid Lower liquidity than liquid funds
Maturity Profile Maturity profile is less than or equal to 91 days. Debt funds invest in papers across maturities.
Impact of interest rate Less impacted by change in interest rate High fluctuations due to interest rate changes.

Debt mutual funds offer variety of investment options but they carry slightly higher risks. So, if you are an extremely conservative investor then liquid funds are the better option for you.

Liquid Mutual Funds Vs Overnight Funds

Overnight funds are like short-term liquid funds. Overnight funds invest in papers that mature in just 1 day. Overnight funds primarily invest in Tri-Party Repo (TREP). Whereas, liquid funds invest in papers which mature in less than 91 days. Due to lower maturity, the returns generated by overnight funds are lower than liquid funds.

Liquid Mutual Funds Vs Overnight Funds – Which is Better?

Parameters Liquid Mutual Funds Overnight Funds
Risk Low Very Low.
Returns Higher than overnight funds Similar to savings account and lower than liquid funds
Underlying Papers Treasury Bills, Certificates of Deposits, Commercial Papers etc Tri-Party Repo (TREPs)
Transparency Not all underlying papers are marked to market. Hence limited transparency is possible. More transparent than liquid funds as underlying papers are marked-to-market.
Impact of Interest rate changes Since liquid funds invest in papers with longer residual maturity, it is less impacted by interest rate changes. Overnight funds generate returns in line with RBI Repo Rate. Excess liquidity reduces the returns on overnight funds and vice versa.

If investors want to replicate savings account returns then overnight funds are the preferred option. But for investors who want to earn superior return, then liquid funds are the perfect option.

Liquid Mutual Funds vs Other Investment Options

Liquid funds are often tempted by other investment options like Public Provident Fund (PPF), Post Office Monthly Income Scheme (POMIS), National Pension Scheme (NPS) etc.

While all these investment options offer slightly higher returns than liquid funds, the biggest disadvantage of these investment options is their lock-in period.

PPF has a 15-year lock-in period. NPS is locked-in till retirement. POMIS has a 5-year lock-in period. Whereas liquid funds have no lock-in period. You can redeem your liquid funds within just 1 day.

Also, these other investment options charge high penalties on premature withdrawal. But liquid funds charge a penalty of only 0.0070%-0.0045% on withdrawal between 1 day – 6 days.

Hence, liquid funds are perfect investment option for contingency fund. They are safe, highly liquid, and offer superior returns. So, build your emergency fund today by investing in the best liquid funds through RankMF. You can open a FREE RankMF account and access the best liquid funds in India for absolutely FREE.

Why Open Free Account in RankMF

Follow the below steps to open a FREE RankMF account today:

  1. Visit and click on register.
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Frequently Asked Questions by investors:
Is Liquid Fund Better than Bank FD?
Liquid funds invest in fixed income instruments which mature within 91 days. Hence liquid funds are very safe. Liquid funds are better than bank FDs as they offer superior inflation-adjusted returns. Historically, liquid fund returns have generated 1%-2% higher returns than bank FDs.
Is TDS deducted in liquid funds like FDs?
No, TDS is not deducted from liquid funds like a bank FD. Though you have to show the gains (short-term or long-term) while filing your tax returns.
Are liquid funds and overnight funds same?
No, liquid funds and overnight funds are not same. They are both types of debt funds but liquid funds invest in papers maturing in 91 days. Whereas overnight funds invest in papers maturing within 1 day.