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Fixed deposit or a liquid fund - which is better for a senior citizen?

Dhirendra Kumar discusses the difference between investing in liquid funds and in fixed deposits

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I am a senior citizen and have about Rs 10 lakh to invest. Should I go for a fixed deposit or invest in a liquid fund? My broker has suggested that investing in liquid funds will provide better returns and my money will be safe as well. Kindly advise.
- Rajendra

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Yes, a liquid fund is quite safe as compared to a fixed deposit. However, one should always take into consideration the performance track record and consistency of a liquid fund or a fund manager. Unlike fixed deposits, liquid funds do not have any predefined rate of return. But if the long-term and recent performance track record of liquid funds are considered, these funds have outperformed fixed deposits with better returns.

Nevertheless, you should also consider some other factors while choosing between these two alternatives. First is your tax bracket. If your holding in a liquid fund completes three years, then your gains qualify for long-term capital gains tax of 20 per cent, with indexation benefit on your original investment. Notably, this tax rate is lower than the tax rate applicable on the fixed deposit interest for those investors falling in the 30% tax bracket.

Besides, with a liquid fund, it is easier to redeem funds at any time. To be able to generate this liquidity, these funds are bound by the law to invest in money market instruments only.

In my opinion, the difference in returns of a liquid fund and a fixed deposit will reduce in the near term. However, the two above-mentioned benefits make liquid funds an attractive option.

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