Liquid funds may turn out to be a better choice than fixed deposits. Fixed deposits incur taxation on an annual basis while liquid funds are taxable only when they are sold. Lets study an example. If you save 5L every year and invest them in fixed deposit and liquid funds both yielding 7% annually, at an inflation rate of 5% over the next 10 years your results would look like the table below. The actual numbers might be different from this illustration.

On Fixed deposits, since you pay tax @30% every year (assuming highest bracket, >10L income), you end up getting an effective rate of 4.9% after tax. Hence 5L would be 5.24L at the end of first year. Liquid funds on the other hand will show a mark to market of 5.35L at the end of first year. Which means you compound a larger capital in liquid funds as effectively you are deferring taxes. Liquid funds are taxed only when you sell and @20% after indexation benefit for the inflation adjusted amount. If you sell them before 3 years their tax treatment will be exactly like fixed deposits. The only case where you lose - if liquid fund rates are much lower than fixed deposits which is generally not the case in financial markets.

In the below example you are around 6L or 10% richer after 10 years. A little hack of financial wisdom might be useful for many investors.

Years Savings Inflation.5% Fixed.deposit Liquid.funds Tax
1 500000 525000 524500 535000
2 500000 1076250 1074701 1107450
3 500000 1655063 1651861 1719972
4 500000 2262816 2257302 2375370
5 500000 2900956 2892410 3076645
6 500000 3571004 3558638 3827011
7 500000 4274554 4257511 4629901
8 500000 5013282 4990629 5488994
9 500000 5788946 5759670 6408224
10 500000 6603394 6566394 7391800 157681.2
6566394 7234118