There are many investment tools available in the market, offering good returns and security. Among the safest investment tools are saving accounts and liquid funds. Both offer great benefits and are secure in nature. In a discussion of saving accounts vs liquid funds, a thorough analysis of both investment schemes is required before coming to any conclusion.
Introduction to a saving account
A savings account is a service provided by the banks to depositors where individuals can deposit their surplus finances and earn interest on their investment. It comes with high liquidity and gives the depositors the convenience of withdrawing money as per their requirement. The objective behind the savings account is to save the surplus money and have easy access to funds during emergencies.
Introduction to liquid funds
Liquid funds are a kind of mutual fund with short-term maturity. These are open-ended schemes with tenure up to 91 days. The funds have mainly invested the corpus into money market instruments including commercial paper, treasury bills and certificates of deposits. The main goal of this investment is liquidity and protection of capital invested. The average interest of these investments ranges from 7% to 9%. It matures in short term with interest almost equal to fixed deposits.
Savings account v/s Liquid funds
To understand which one is more suitable for you, here are some parameters to compare the two.
Interest rates
The interest rate of 7% to 9% is average to be expected in liquid funds. This rate of interest is considerably higher than the saving accounts. The rate of interest we get on a saving account ranges from 3% to 4%. Higher interest rate means higher returns. Hence, liquids funds are better options than savings account for availing higher interest rates and earning greater returns on investment in a short period of time.
Security of Investment
The security is most considerable when it comes to finances. No one wants to lose their hard-earned money. Liquid funds are highly debt mutual funds. These investments provide protected capital with risk-free returns and hence, liquid funds are at minimal risk. They are at low risks as compared to equities. The user can choose this option considering the financial goals. The plus points go when on bank deposits the depositor has to pay income tax if the interest amount earned goes over 10 thousand whereas, in liquid funds, the interest amount is free from income tax cost for the beginning 3 years. After a tenure of 3 years, the depositor has to pay Long Term Capital Gain Tax (LTCG) for the interest amount gained in liquid funds. Therefore it is highly recommended to invest in liquid funds rather than investing in a savings account.
Risks
Savings accounts are risk-free until the whole bank of the country crashes economically. The rate of interest gained is fixed and deposited every month in the accounts, whereas mutual funds are subjected to market risks. If the market fluctuates the risk of high interest or losses fluctuates. But the NAV fluctuations of liquid funds are not similar due to the interests earned by securities being divided into the tenure thoroughly gives an almost linear pattern of interest. This way, liquid funds are more or less secure as compared to mutual funds.
Minimum balance term
The bank demands to maintain a minimum balance all over the tenure and even charge you if the balance drops below the minimum limit. There are zero balance savings accounts, but the standard ones come with the minimum balance requirement. There is no such policy in liquid funds. You can deposit an amount according to your convenience. Even there is no lock over deposit and they are highly liquified. There are many plans available for liquid funds. The depositor can choose according to the goals for their finances. The amount is easily redeemable as it comes into your account within 2 days.
Bottom line
There are pros and cons for savings accounts as well as for liquid funds. In terms of returns, liquid funds are definitely better than savings accounts. But your investment decision should not be made based on the rate of interest only. Take decisions wisely. If you have some short term goals like travelling, party, buying new gadgets or appliances or want to invest in property, liquid funds are a great option for you as they help you in starting small savings. If your plans are for a long period, then open savings account as have no risks and they help you to set on a financial journey. Plans and goals are personal to everyone so the way of investments. Investments and savings with proper knowledge and planning lead to their dream destinations. Once you have selected one between these two, select your bank after a thoughtful consideration as well.