After the Reserve Bank of India raised the repo rate by 50 basis points for the third time many banks increased their interest rates. Now the RBI repo rates stand at 5.9% taking the tally of rate hikes to 190 bps since May. The State Bank of India (SBI), the largest lender in the public sector in India has hiked the interest rate for below ₹2 crore with effect from October 22. Both HDFC Bank and ICICI Bank have increased term deposit rates.
Is it now appropriate to invest your funds in FDs given their rising interest rates? Experts say that the present FD interest rates cannot keep up with inflation. Are liquid funds suitable for investing? FDs and liquid funds are oftentimes misunderstood by investors. Let us find out.
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Liquid funds:
Liquid funds invest in fixed-income instruments, such as treasury bills, commercial paper, government securities, bonds, and debentures, with maturities of up to 91 days or 3 months.
In liquid funds, there is no lock-in, according to Manoj Dalmia, founder and director of competent equities Private Limited.
He noted that because liquid funds are subject to indexation benefits as well as short- and long-term capital gain taxes, capital gains are taxed when an investor redeems fund units for a sum greater than what they were originally purchased for.
Fixed deposits:
One can invest in fixed deposits for a period of time ranging from seven days to ten years, but short-term returns are often comparable to those of savings accounts and only long-term returns are better.
“It is important to keep in mind that in bank fixed deposits, your investments are locked in for the chosen tenure, making early withdrawals is only possible with a penalty. This lowers the interest income and also makes fixed deposits unsuitable for emergencies," said Manoj Dalmia.
Difference between Liquid funds and Fixed deposits:
Short-term surpluses can be parked into both- liquid funds or bank FDs to earn modest yields with minimal risk. If unsure whether to redeem, one may opt for liquid funds. While securities in a Liquid Fund are subject to daily mark to market, FDs provide returns without volatility.
