How to decide between short-term FDs and liquid mutual funds in a volatile market

Knowing your options

Where the market is unstable, identifying the optimal place for your short-term money is not an easy task. Short-term fixed deposits (FDs) and liquid mutual funds are two of the most popular alternatives, with their respective advantages. Short-term FDs offer guaranteed returns and safety, but liquid mutual funds offer flexibility as well as better returns, though with a market-related risk. Knowing how each operates is the key to making an informed decision.

The appeal of short-term FDs

Short-term FDs are ideal for conservative investors who want security more than high returns. You deposit a sum and for a fixed term to get interest secured by the bank. That way, FDs are a secure option in times of uncertainty as your money and interest are guaranteed regardless of what happens to the markets. Short-term FDs also provide you with surety—you know exactly what you will get when it matures.

Why liquid mutual funds are worth consideration

Liquid mutual funds invest in short-term debt instruments and earn greater returns than savings accounts. They are extremely liquid, i.e., you can withdraw at short notice, generally in one or two days. In volatile markets, such funds have the benefit of earning more interest than FDs while providing satisfactory safety, provided you don’t intend to tie money up for a period.

Balancing risk and flexibility

The choice between FDs and liquid funds would wholly be a function of your risk appetite and investment horizon. If you prefer the absolute security and assured returns, then FDs would be appropriate. If you can stomach small fluctuations for the promise of marginally better returns but need to draw the money at short notice, liquid mutual funds may be more suitable. The majority of investors have a blend, putting money in FDs for safety and some in liquid funds for ease of exit.

Making the right decision

Finally, short-term investment at a shaky stage depends on striking a balance between safety, returns, and liquidity. Put numbers to your immediate cash need, tolerance for limited price fluctuations, and investment expectations. Having knowledge of the rules of both FDs and liquid mutual funds, you can deploy your short-term savings with best results without jeopardizing yourself.

FAQs

Q: Are bank FDs completely safe?

Yes, bank FDs are guaranteed, and your funds are secure even during volatile periods.

Q: Are liquid mutual funds safer than FDs?

Although low-risk, returns are sensitive to the market, and marginal changes can occur.

Q: Which of these to keep for emergency funds?

Liquid mutual funds are generally kept for emergencies due to more rapid accessibility, but FDs can be utilized if predictability is assigned higher importance.