Which is better: Liquid Funds or Savings Account?

  • Posted By : reliancesmartmoney.com
  • Tuesday Dec 04, 2018

When you start earning money, it is a great feeling to see the amount accumulate in your savings account. Month after month, your salary falls into your bank account promptly and the value increases. But over time, your money simply sits idle in your account.
Is this the right way to use surplus cash?
Well, there is another option for you: liquid funds.

In this article, let us compare the two investment avenues and find out which is a better option when it comes to your surplus cash.

Rate of Return

This is probably the most important factor of comparison.
At 3.5-4%, the interest rate on savings account is quite low. These returns are inadequate to counter the effect of inflation and not suitable for wealth accumulation.
In comparison, the interest rate on liquid funds is generally in the range of 7-9%. This is considerably higher than what you would earn from a savings account.

Risk factor

In the category of debt mutual funds, liquid funds are generally considered to be the least risky products. However, the risk is still higher than savings accounts, which are considered to offer risk-free returns. That means you get an assured return on your savings at a pre-fixed interest rate. But if the rate of inflation is higher than the rate of interest you earn on your savings account, you could be exposed to the risk of losing your purchasing power.

Lock-in period

Savings accounts like Fixed Deposits (FD) have a fixed lock-in period. Banks impose a penalty if you break your FD and withdraw your amount pre-maturely.
But in the case of liquid funds, there is no lock-in period on withdrawals. You can withdraw your investments at any point in time. In fact, many mutual fund houses offer instant redemption of up to Rs. 50,000 per day. 

Factors Liquid Fund   Savings Account
 Rate of Return  7-9% - considerably higher  3.5-4% - quite low
 Risk factor  Considered least risky   Considered risk-free
 Lock-in period  No lock-in period  Fixed lock-in period in FDs

So which is better: Savings Account or Liquid Account? 

Both these avenues serve their purpose to the investor. But overall, a liquid fund is a better option compared to a savings account.
Ideally, you should keep a limited amount of money (say, a month’s salary) in your savings bank account. This can help you meet your daily cash flows and other immediate emergencies. But beyond that, it is better to invest around 3-6 months of your expenses in liquid funds to earn a higher rate of interest on your investments.

Consider the benefits of investing in liquid funds through reliancesmartmoney.com which is an one stop shop for your investment needs.

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