Mutual Funds

Liquid Funds vs FD: which one protects your wealth better?

Should you pick liquid funds or fixed deposits? Discover how each works, their benefits, and which option keeps your money safer while meeting your goals.

Team Dhan

20 Aug 2025 — 4 min read

Photo by Towfiqu barbhuiya / Unsplash

Two investment options excel when you want to keep your money and earn returns safely. These options are Fixed Deposits (FDs) and liquid funds. Each offers unique benefits that appeal to many people in India. They differ in fulfilling financial goals, investment tenures, and risk tolerance requirements. FDs were rather popular as a safe and consistent investment option before mutual fund advancement in the domestic market.

While FDs have long been the go-to choice for risk-averse investors, liquid funds have steadily emerged as a modern alternative. They offer flexibility, quick access to cash, and the potential for slightly higher returns. The choice between the two often comes down to how much safety, liquidity, and growth an investor is looking for. Understanding the trade-offs can help you decide which option truly protects your wealth better.

What are Liquid Funds?

A liquid fund is a mutual fund that invests in low-risk, short-term financial instruments. The financial products include treasury bills, government bonds, and commercial papers. It aims to offer returns higher than those in a savings account, with reduced risk.

It also aims to ensure the safety of the capital invested. They invest in high-rated money market instruments for guaranteed returns. They are comparatively safer than other categories of mutual funds. The risk level is low to moderate. Now that you know what are liquid funds, let’s explore their benefits:

The benefits of investing in Liquid Funds

They are safer than other mutual funds.
The returns offered are better than those in a savings bank account.
They are easily accessible, and you can quickly withdraw your money.
No lock-in period means you can invest or withdraw money whenever required.
They keep your money safe and grow it.

What are Fixed Deposits (FDs)

A Fixed Deposit (FD) involves depositing your money in a financial institution or bank for a fixed duration (l-5 years). The interest rate is confirmed at the time of investment. It remains the same until your FD matures.

Backed by the government, they provide guaranteed returns. But you can’t access the money you deposit before the maturity date. They present a secure way to grow your money over time. Many prefer FD to save money for specific life goals.

The benefits of investing in FDs

They benefit investors who don’t wish to tolerate any risk in their investments.
The safety is never compromised because RBI manages them.
They are perfect for long-term investment to fulfil your major life goals.
They are also perfect for risk-avoiding investors looking for a guaranteed return.
The interest is fixed over a predetermined tenure.

Knowing what are fixed deposits, now you can easily understand the differences.

The differences

The table below clarifies the differences between liquid funds and fixed deposits.

Parameter	Liquid Funds	FDs
Investment type	Short-term or Long-term	Long-term
Risk	Medium risk because the market volatility and the economic conditions affect the investment	They are low-risk investments provided by banks or NBFCs, often backed by insurance to protect the invested capital.
Return	They don’t provide guaranteed returns. However, the returns offered are higher than those in FDs.	Provide a fixed rate of return overseen by the RBI. Returns are comparatively lower than liquid funds.
Interest rate	Depends on how well the underlying investment performs.	Fixed at the time of investment and continues to be the same until maturity.
Liquidity	Comes with high liquidity; investors can withdraw anytime.	Low liquidity; investors have to wait until the maturity date to access funds without paying the penalty
Taxation	If the holding period exceeds 3 years, it is taxed as long-term capital gain at 20% after indexation.	The interest from fixed deposits is credited to your annual income and taxed according to the relevant tax slab.
Tenure	7 days to 91 days	7 days to 10 years

The comparison

Here's a comprehensive comparison of liquid funds with fixed deposits:

Parameter	Liquid Funds	Fixed Deposits
Investment tenure	The high liquidity makes liquid funds a better choice for short-term investment.	FDs are more appropriate for medium to long-term investments (1-5 years). They ensure fixed returns over a long tenure.
Risk tolerance	Some market risks involve liquid funds because they invest your funds in short-term securities. So, go for liquid funds if you can afford the risk with the possibility of obtaining higher returns.	There is no market risk involved in FDs; they offer guaranteed returns. If your priority is a safe investment, then go for FDs.
Returns	Generally, liquid funds provide higher returns than FDs. Note that returns differ depending on market conditions.	FDs provide guaranteed fixed returns. However, those returns may not beat price rises over time.
Taxation	The returns obtained from liquid funds are taxed as short-term or long-term capital gains, based on the holding period.	The interest from FD is taxed according to your income tax slab; TDS may be deducted.

The safer bet?

Your financial goals, risk tolerance, and investment horizon could determine the choice between an FD vs liquid fund.

Liquid Funds

If you need high liquidity for short-term goals or emergency funds, liquid funds are a smart choice. They are also well-suited for investors in higher tax brackets, as they can offer more tax-efficient returns. While returns may vary slightly compared to traditional instruments, liquid funds provide flexibility and quick access to money, making them a practical option for those with evolving financial needs.

Fixed Deposits

On the other hand, fixed deposits are ideal if you prioritise low-risk investments with steady, guaranteed returns. They work well when you want to lock in funds for a definite period and value capital protection above all. FDs also appeal to those who prefer a simple, traditional investment route without the need to track market movements. For long-term financial goals that require certainty and stability, FDs remain a trusted option.

Wrapping up

Liquid funds are recognised as a type of mutual fund, whereas FDs represent traditional savings products from banks. Both of them are excellent financial tools and cater to diverse needs. FDs are best considered for guaranteed earnings and safe investment. Liquid funds are more suitable for those chasing flexibility and higher returns. The discussion of liquid funds vs fixed deposits will help you make a wise choice. Don’t forget to align your priorities when choosing to secure your financial future.