These are two instruments which are used to earn some interest on money lying idle in bank or money which has been set aside for a purpose.

We understand what are fixed deposit what many investors are not aware of is liquid fund

Well Liquid fund as the name suggests are Mutual Fund Schemes keep our money “liquid” [almost cash]

These liquid funds are debt funds that work in money market instruments [It is a market for short term borrowing and lending. Overnight, two day, ten day, a month paper is what is bought and sold.]

For ease of understanding we will compare two products in each category.

Two things come in to play while comparing the two product categories:

1. Return on Investments

2. Tax Treatment

1. Return on Investments

Fixed Deposit

A Fixed Deposit will give a known rate of interest for a known period. So say a 61 – 90 days fixed deposit in HDFC Bank will fetch you a return of 5.5% for a senior citizen.

Liquid Fund

A Liquid Fund the rate of return is not known in advance instead it fluctuates based on the NAV .However the risk is minimal and the typical return for a decent Liquid fund would range from 5-7% .For example the DSP ML Liquid Plus Regular Fund has given one year return of 8.67%

2. Tax Treatment

Fixed Deposit

The interest on Fixed deposit is taxed by adding it to the assesses income .Hence if you belong to the highest tax bracket you will be taxed at 30%, thus wiping out a huge chunk of return.

Liquid Fund

A Liquid Fund has an advantage here if you opt for a dividend option the dividend is tax free in the hands of the investor that’s right.”NO TAX” for you. In some schemes like the HDFC AMC’s Treasury plan you get daily dividend on the investment made thus giving you the freedom to remove money on any day you need it.

Conclusion:

While the fixed deposit scores in terms of reliability of return .Liquid fund scores on the liquidity, rate of return and tax treatment. Presha Investments recommends liquid funds for those who are income tax assesses & need to park funds for shorter tenures

Question about debt funding

How Funds are sold

Mutual Funds primarily depend upon individual agents and distribution companies to market their schemes to the investors. Nowadays, they also market their schemes directly.

The individual agents who sell schemes of various Mutual Funds also act as financial advisors to many investors. Hence they are required to clear various examinations before acting as an agent. Many Mutual Funds prefer to deal with distribution agency than individual agents as it is easier to manage. These distribution agencies, with their highly qualified executives, will be able to offer better financial advice than individual agents to the investors.

Nowadays, the sales officers and other employees of the investment companies directly approach the investors (particularly the high net worth individuals and corporate clients) to sell different schemes. However, most of the sales of Mutual Funds happen through other distribution route than from marketing directly.

Investment Policies

Every Mutual Fund has a specified investment policy which will be described in the Mutual Fund’s prospectus. A family of Mutual Funds will be managed by an Asset Management Company. This Asset Management Company will collect funds from investors and charge a management fee for operating them. They enable investors to invest across different market sectors and switch assets across funds while still benefiting from centralized record keeping.

The investment policies of different types of funds are as follows:

• Equity Funds. They invest in stock. However, they will hold 4% to 5% of their assets in money market securities to offer liquidity. Income funds will hold shares of firms giving high dividend yield and Growth funds will hold shares of firms that enable faster capital appreciation. Sector funds focus on a particular industry.

• Debt Funds. These funds invest in fixed-income securities. Different funds will concentrate on Treasury bills, corporate bonds, Mortgage-backed securities and other kinds of bonds. Some of the funds also specialize on maturity.

• Index Funds. Index funds buy shares that are included in a particular index in proportion to each share’s representation in that index. Investing in index funds is a passive strategy because the investors need not do any security analysis.

• Money Market Funds. These funds invest in short-term low-risk instruments of the money market. Since the liquidity is high, some of the funds even offer cheque writing facilities to their investors.

Apart from these funds there are many different varieties of funds with unique investment policies like the international funds which invest in different securities across the world, the balanced funds which minimize risk without compromising heavily on growth opportunities and current income and the flexible funds which depend on market timing.

For more information about how mutual funds work visit Mutual Funds and to know about investing in mutual funds visit Investing in Mutual Funds

Question about debt funding