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Should You Invest Your Excess Funds in Liquid Funds or Savings Accounts?
Posted on Monday, May 27th, 2024 | By IndusInd Bank
As disposable income increases, individuals often face the dilemma of what to do with excess funds. Return on investment is an essential factor to consider while making an investment choice. However, liquidity shouldn’t be ignored. While a savings account offers liquidity, liquid funds have emerged as a popular investment choice.
What are Liquid Funds?
Liquid funds are debt mutual fund that invests in debt securities with a maturity of up to 91 days. They invest in short-term money market instruments such as treasury bills, certificates of deposits, and commercial papers. Their key feature is financial liquidity, allowing investors to redeem their investments within one working day. Liquid funds aim for Principal preservation and liquidity, offering investors the flexibility to invest for the short term.
What are Savings Accounts?
Savings accounts are popular among individuals for maintaining emergency funds. They provide interest on deposits and liquidity, as investors can withdraw funds anytime. Hence, they are crucial for any individual’s financial planning. Although the savings account interest rate is lower than that of liquid funds, investors have a sense of security as it is a bank deposit.
Also Read: An Insight into Savings Account by IndusInd Bank
What are the Differences between Liquid Funds and Savings Accounts?
On the surface, liquid funds and savings accounts sound similar; however, there are underlying differences between the two, which are detailed below:
| Parameters | Liquid Funds | Savings Account |
| Objective of investment | Invest in the money market to earn potentially higher interest rates than savings accounts. | To keep funds safe and accessible and also earn interest. |
| Liquidity | With high liquidity, an investor can redeem funds generally within one working day. | High liquidity as funds are always accessible and can be immediately withdrawn using an ATM card. They can also be transferred through net banking and online banking. These are some of the most popular savings account features. |
| Risk | Comes with low to moderate risk. The risks involved are interest risk, credit risk, and market risks. | Comes with low risk as interest rates do not fluctuate often since it’s a bank deposit. Also, it offers low credit risk and no market risk. |
| Returns | Market-linked returns | Fixed returns |
| Taxation | Returns from liquid funds are not tax-free and attract short-term capital gains tax. | Interest over ₹ 10,000 attracts tax as per the tax slab of an individual. |
| Interest rate guarantee | Market linked and hence returns vary. | Savings Account interest rates have fixed percentages. |
| Regulated by | SEBI regulates liquid funds. | RBI regulates savings accounts. |
Also Read: How to Open Savings Account Online with IndusInd Bank
Do Liquid Funds And Savings Accounts Have Anything In Common?
Despite their differences, liquid funds and savings accounts are similar. Following are the common liquid fund and savings account features.
- Both investment options provide liquidity, suitable for emergency funds.
- Both are complementary and can be part of a diversified asset allocation strategy.
- Both are regulated, ensuring investor security.
Conclusion
Diversification is key in personal finance. While liquid funds and savings accounts have similarities and differences, the choice depends on an investor’s risk appetite and financial goal.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
