Traditionally, individuals have favoured savings accounts as a secure and convenient option to hold their extra funds. These accounts offer easy accessibility and carry minimal risk. However, the emergence of liquid funds in recent years has prompted a comparison: Are liquid funds superior to savings accounts? Let’s explore the specifics:
Convenient Withdrawals
When it comes to accessing your funds, both savings accounts and liquid funds offer a high level of convenience. Savings accounts allow for penalty-free withdrawals whenever necessary. Similarly, liquid funds, which fall under mutual funds, provide comparable liquidity. You can swiftly withdraw your funds, typically within 1-3 business days, depending on the specific terms and conditions of the fund.
Investment Returns
Considering the potential return on investment, savings accounts typically offer conservative interest rates that may struggle to keep up with inflation. In contrast, liquid funds have the opportunity for higher returns. These funds invest in short-term money market instruments such as treasury bills, commercial papers, and certificates of deposit, which generally yield higher interest rates than savings accounts. However, it’s important to note that returns from liquid funds are subject to market fluctuations and carry a certain level of risk. Adhil Shetty, CEO of Bank-bazaar.com, suggests that liquid mutual funds have a reputation for occasionally providing slightly higher returns than bank deposits. As a savvy saver, it’s about securing that extra percentage in interest without taking unnecessary risks, and liquid funds are one option to consider.
When it comes to savings accounts, you have a range of options available. You can select from government banks, private banks, small finance banks, cooperative banks, and even the post office. A savings account offers convenient access to your funds while ensuring liquidity and preserving financial flexibility.
Risk Evaluation
When assessing the risk associated with savings accounts and liquid funds, it’s crucial to consider their differences. Savings accounts are generally deemed low-risk due to the protection provided by government-backed deposit insurance schemes. On the other hand, liquid funds are market-dependent investments and do not offer guaranteed returns. While they primarily invest in low-risk money market instruments, there is a potential for slight fluctuations in the fund’s net asset value (NAV), which may result in minor capital losses. Nonetheless, liquid funds are considered less risky than other mutual fund categories, such as equity funds.
Investment Diversification
Liquid funds offer the advantage of investment diversification. While savings accounts involve depositing funds with a single bank, liquid funds allocate investments across a portfolio of money market instruments issued by various entities. This diversification provides the benefit of spreading risk among multiple issuers, reducing the impact of any potential default by a single entity. Consequently, liquid funds can offer a slightly higher level of safety compared to savings accounts
A savings account is suitable if your primary concerns revolve around liquidity and safety. However, if you’re open to assuming a slightly higher level of risk in exchange for potentially higher returns and added diversification, liquid funds can be a viable alternative. Evaluating your financial goals, risk tolerance, and liquidity requirements is crucial before deciding.
Benefits
- Potential for Higher Returns: Liquid funds can generate higher returns than traditional savings accounts due to their investment in short-term money market instruments.
- Swift Withdrawals: One of the advantages of liquid funds is the ability to withdraw funds immediately or within a short period, typically between 1-3 business days, providing quick access to your money when needed.
- Consider Your Financial Goals and Risk Tolerance: It is essential to assess your financial goals and risk tolerance before deciding between savings accounts and liquid funds, as it will help you align your investment choice with your specific needs and preferences.
For any clarifications/feedback on the topic, please contact the writer at samiksha.swayambhu@clear.in
I am an engineer passionate about literature, content, books, feline companions, and practising yoga. I love navigating diverse genres, which led me to my work here at ClearTax.
