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Are Liquid Funds a Better Alternative to Savings Account?

Highlights

  • Savings Account vs Liquid Fund - Where Should You Put Your Money?
  • Liquid fund with a scope for potentially greater returns should be your pick

A savings bank account is all but common for all of us. Some have regular savings account whereas others have a salary account which is a variant of the former. The savings account deposits earn you interest at the rate of 3.50%-4.00% per annum across most banks in India. A few private sector banks such as Kotak Mahindra Bank, IndusInd Bank offer interest rates of as much as 6%, depending on the balance in the account. But, will that be enough to lead the life amidst growing inflation? No, isn’t it? So, where else you can park your money?

Financial experts see liquid funds, a type of mutual fund that invests predominantly in liquid instruments such as treasury bills, certificates of deposits, commercial papers, etc, an alternative to a savings account. These funds not only have the potential to deliver greater returns but are a relatively safe option as well. This article not only explains the difference between the two but also tells which is the better option for you.

Points of Comparison Between Liquid Funds and Savings Account

The table below illustrates the difference between liquid funds and savings account on different aspects.

AspectsSavings Account (In ₹)Liquid Fund (In ₹)
Minimum Balance Required₹1,000 & Above₹5,000 & Above (Lump Sum)
Where to OpenBanksInvest in liquid funds directly at an Asset Management Company (AMC) or through distributors
Interest/Return3.50%-6% per annumThe returns are not definite, but can potentially deliver 7%-9% return
LiquidityCan be withdrawn anytimeCan be withdrawn anytime
Suitable to WhomConservative InvestorsConservative Investors
People Also Look For  Choose bond fund of your risk profile to avoid loss of money

Residual Value of Savings & Liquid Funds

Example – If you keep ₹50,000 in savings account for 3 months and the same you do for liquid funds, how much returns you are likely to get in each of the two? While savings account would earn you an interest of around ₹493 at an interest rate of 4% per annum, liquid funds are likely to earn you a profit of around ₹971 over three months at an assumed annual return rate of 8%. You can see more than double the amount you are likely to earn on your liquid fund investments.

Formula Used to Calculate Interest on Savings Account = Principal Amount x Rate of Interest x Number of Days of Deposit/365×100

Conclusion

Well, you must have a savings account. But make sure to divert some of the deposits to liquid fund investments to earn more on your money.

Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme document carefully before investing”.