Savings accounts are low-risk instruments and liquid funds come with higher risk.
Savings accounts pay low-interest rates that may not keep up with inflation.
Savings accounts are a popular option for people to keep their cash since they provide simple access and little risk. However, liquid funds have also emerged as a viable alternative to savings accounts lately. Is a liquid fund better than a savings account? Let’s go into the details.
Simple access to funds
Most people take liquidity into account when selecting an investment option. Savings accounts allow you to withdraw money anytime you need and without penalty. Liquid funds, a form of mutual fund, provide similar benefits. Depending on the terms and conditions of the fund, you can withdraw money immediately or within a short period, often between one and three business days.
ROI (return on investment)
Another critical factor to consider is the return on investment (ROI). Savings accounts pay low-interest rates that may not keep up with inflation. On the other hand, liquid funds have the potential to earn larger returns because they invest in short-term money markets products such as treasury bills, commercial papers and certificates of deposit. When compared to savings account interest rates, these securities provide higher yields. Returns from liquid funds, on the other hand, are subject to market volatility and carry risk.
Risk evaluation
Savings accounts are low-risk instruments because they are often covered by government-backed deposit insurance schemes. But liquid funds are market-linked products that are not guaranteed. There is always the danger of the fund’s net asset value (NAV) fluctuating slightly, resulting in capital losses. However, liquid funds are less hazardous when compared to other mutual fund categories such as equities funds.
Taxation
Another aspect to consider is taxation. Interests earned on a savings account are considered “Income from Other Sources” and are taxable according to an individual’s tax bracket. On the other hand, if the liquid funds’ investment is held for less than three years, any gains are deemed short-term capital gains. These gains are added to the individual’s total income and taxed at the applicable slab rates.
Investment diversification
Diversification is another benefit liquid funds offer. When you open a savings account, your money is effectively with a single bank. Liquid funds invest in a portfolio of money market instruments issued by several businesses, providing diversification benefits. This diversification spreads the risk among numerous investors.
Savings accounts and liquid funds both have their advantages. If liquidity and security are your key concerns, a savings account can be a good choice. However, if you are ready to take some risk in exchange for potentially higher returns and additional diversification, liquid funds can be a better option.
Before making a selection, consider your financial objectives, risk tolerance and liquidity needs.
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