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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

While comparing a bank fixed deposit with a debt mutual fund for a client who may need money at short notice, which feature of the bank fixed deposit is most relevant to liquidity?

An ordinary bank fixed deposit can usually be closed before maturity, but the bank generally levies a penalty by lowering the interest paid. So liquidity exists but at a cost, unlike a tax-saving FD with a five-year lock-in or an exchange-traded instrument.

  1. APremature withdrawal is usually permitted but may attract a penalty on the interest rateCorrect
  2. BUnits can be redeemed at NAV without any condition
  3. CThe deposit can be sold on a stock exchange at market price
  4. DPremature withdrawal is never permitted

Explanation

Most bank FDs (other than tax-saving FDs with a lock-in) allow premature closure, but banks typically charge a penalty by reducing the interest rate. Debt fund redemption is at NAV, which can fluctuate, and bank FDs are not exchange traded. Saying withdrawal is never permitted is wrong for ordinary FDs.

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