What are liquid mutual funds?
Liquid mutual funds belong to the debt category of mutual funds. Under this category, the investment is in short-term market instruments like treasury bills, government securities, etc. These funds have higher returns as compared to that of fixed deposits and have high liquidity. The risk is very low or negligible as liquid funds invest in instruments with high credit rating.

What is a fixed deposit?
Fixed deposit means parking your money under any bank, with almost same return as that of liquid funds, with negligible risk and for a fixed period of time. When you deposit your money under a fixed deposit, there is less liquidity, as it is not flexible in terms of time.

Now, to decide what is better, it depends on what suits you the best. If you want a comparatively higher return, with low risk and with ease of liquidity (you can actually invest for a day to 6 months). Liquid mutual funds are generally preferred when investor have idle money lying for a short period of time and they want to earn interest even on them, as the money can easily be withdrawn from it any time, within 24 hours. While the only drawback of fixed deposit is inflexibility in terms of time. As such, liquid mutual funds do not really help you save tax. Besides, when you sell liquid funds in a short span of time (before 3 years) you have to pay capital gain tax on the same as per the applicable rate.