Liquid funds have their benefits such as no penalty on premature withdrawal, higher yields, and you can park in your savings for a shorter period. But, if you think they are safe and secure, and then think again, a day-long negative return on liquid funds can also be disastrous because large amounts of cash are parked in liquid funds.
Fixed deposits do not bear this kind of risk, yes, there may be penalties for pre-withdrawal, but the risk factor is nowhere to be seen. There is no negative return on FD plans, and it is guaranteed that you will get a fixed amount after the maturity period. Apart from this, other tax benefits also linked to FD.
Mahindra Finance’s fixed deposit schemes are good and can be investigated by those willing to invest in FDs. They raise highly competitive interest rates, which are continuously increasing.
In the context of the Indian public, there are two explanations I can think of.
Lack of awareness: I am not sure when liquid fund schemes introduced in India, but I know that fixed deposit schemes have been in the market for a very long time. A lot of people here are not aware of some incredible investment schemes which can be very profitable for them.
I believe that liquid fund schemes not promoted like FD schemes, and even if promoted, it will take time to gain trust among people and attract their customers.
Risk factor: For a long time, FDs have been around and people have developed confidence in FD schemes because their money is not at risk. That is not the case in liquid fund schemes. Usually, a common man does not think like an investor. Instead of generating revenue from the same, he plans to save money for a specific purpose (to use it later). And as liquid funds earn income from market instruments, returns from liquid funds may rise or fall depending on market rates. The cash left for your daughter’s marriage, or medical emergency cannot be trusted.
Liquid funds provide better liquidity than bank FDs and bank FDs will penalize premature withdrawals. Still, there are new schemes available, in which FDs not liquidated for pre-mature withdrawal.
Conclusion: As we know that the returns of liquid funds can increase or decrease depending on the market rate condition and liquid funds invest in short term securities. On the other hand, fixed deposits usually have a comparatively shorter closing time. Money is deposited immediately by banks.
These reasons may be responsible, which makes people more comfortable to invest in fixed deposits as opposed to liquid funds.
Note: It is just a matter of perception; those who want to choose the calculated risks go for liquid funds and those who want to play it choose the safe option for FD. I am interested in investing in mutual funds, but until I wrote this article, I was not aware of liquid funds.