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Bank FD vs. Liquid Mutual Funds. The last 2 differences are the most important

Updated: Mar 27, 2023

Let's compare the two -

Similarity in the two
Returns -

Comparable. Both are offering a return in the range of 6.5-7.5% p.a.

Liquidity -

Immediate in both.

Safety -

Liquid MFs park your money in government securities, bank bonds, highest-rated corporate bonds. They carry almost no credit risk, no liquidity risk and hence, are extremely safe.

Two Important Differences
1. Tenure -

Now here is the difference. Bank FD is yielding 6.5-7.5% p.a. for a tenure of 1 year. But when you go down for shorter tenures (like 3 months/6 months), the yields fall down to 4.5-5.5% p.a.

While, liquid mutual funds still will give you 6.5-7% p.a. for even shorter time frames.

2. Taxation -

A lot of us park money in Bank FD, which we might not end up even using for the next 2-3 years.

Difference - Deferment of Tax (Delayed tax payment)

Regardless of whether/ not you use the money, in Bank FD, you're supposed to pay tax on the interest earned every year on your tax slab rate.

while, in liquid funds, you're supposed to pay tax on the income earned (or gains made) only in the year of withdrawal.

Hence, you get a big benefit of - deferment of tax. So in the above case, if you withdraw the money only after 3 years , in liquid MF, you'll pay tax only in the 3rd year, while in Bank FD, you will have to pay tax every year.

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