What’s the story
For those looking for short-term savings, recurring deposits and liquid mutual funds are two popular options.
Both provide different benefits and risks, making it important for investors to understand the difference between the two.
While recurring deposits guarantee fixed returns over a certain period, liquid mutual funds invest in short-term securities with variable returns.
Here’s a look at how each option works, and its pros and cons.
Understanding Recurring Deposits
Recurring deposits are savings schemes offered by banks where you deposit a fixed amount every month for a certain period.
The interest is usually higher than regular savings accounts but lower than other investment options like fixed deposits or mutual funds.
The principal amount is returned at maturity along with the interest earned.
This option is ideal for risk-averse investors wanting predictable returns.
Exploring liquid mutual funds
Liquid mutual funds invest in short-term debt instruments such as treasury bills, commercial papers, and so on.
They offer higher liquidity than traditional savings accounts or fixed deposits as investors can withdraw their money at any time without penalty.
However, the returns are not guaranteed and depend on market conditions.
These funds are suitable for those willing to take some risk for potentially higher returns.
Comparing returns and risks
While recurring deposits offer fixed returns, liquid mutual funds come with variable returns depending on market performance.
Historically, recurring deposits offer around 5% to 7% interest per annum, while liquid mutual funds can yield anywhere between 4% and 6% net of fees but with more volatility.
The risk factor is higher with mutual funds due to market fluctuations but can also be rewarding.
Assessing liquidity options
Liquidity is an important factor when choosing between these two options.
Recurring deposits lock your money until maturity, which can be anywhere between six months to 10 years, depending on the bank’s policies.
Liquid mutual funds allow you to redeem your units anytime during business hours, making them more flexible for those who may need immediate access to cash without penalties or charges.