Liquid Funds Vs Savings Accounts - Where to Invest
Updated on 15th Jan 20254 Min read
If you are debating where to park your funds, whether in a savings account or liquid funds like treasury bills, you are at the right place. In this blog, we will evaluate the characteristics of each and determine which is more beneficial. This will help you decide for your future. So, let's begin by understanding the meaning first.
What is a savings account?
A savings account is a simple and essential banking option for managing your money. It is the safest and most convenient place to deposit your money. In return, banks offer you interest on the money in your bank account. It also allows you to withdraw funds as and when you need them via cheques, UPI and ATM cards. You can open savings account anywhere in India to keep your money and earn interest on it.
What are liquid funds?
Think of liquid funds as a safe place to park your money for a short term. They offer more flexibility and slightly higher returns than keeping cash in a bank's savings account, making them a popular choice for emergency funds or short-term financial goals.
They belong to a category of mutual funds. These market-linked instruments are considered low risk. This is because the funds are invested in short-term assets like commercial paper, certificates of deposit and treasury bills. They are called “liquid” because you can quickly withdraw your money when you need it, usually within one business day.
Difference between savings accounts and liquid funds
| Points of Distinction | Savings accounts | Liquid funds |
|---|---|---|
| Returns | The interest rate typically ranges from 3% to 4% per annum. The returns are fixed and guaranteed. | The interest rate typically ranges from 4% to 7% per annum. The returns vary as they depend on market and the performance of the underlying securities. |
| Tax | Interest earned up to ₹10,000 per year is tax-free under Section 80TTA of the Income Tax Act. Any interest above this limit is taxed according to the individual's tax slab. | Gains from liquid funds are taxed differently. Short-term capital gains (held for less than three years) are taxed according to the individual's tax slab. Long-term capital gains (held for more than three years) are taxed at 20% with indexation benefits. |
| Risk | Considered very safe, with minimal to no risk of losing the principal amount. Deposits are insured up to ₹5 lakhs per account holder by the Deposit Insurance and Credit Guarantee Corporation (DICGC). | Generally low risk, but not entirely risk-free. The value fluctuates based on market conditions. However, since they invest in short-term instruments, the risk is relatively low compared to other mutual funds. |
| Liquidity | Highly liquid. You can withdraw funds at any time without any delay or penalty. | Also highly liquid, with most funds allowing you to redeem your investments and receive money within one business day. Some liquid funds even offer instant redemption, providing immediate access to a portion of your investment. |
| Investment horizon | Ideal for very short-term needs or as a parking place for emergency funds where immediate access is necessary. | Suitable for short to medium-term goals where you don't need immediate access but want better returns than a savings account. |
| Compounding of returns | Interest is usually compounded quarterly or monthly, adding stability to the growth of your savings. | Returns are based on the daily NAV (Net Asset Value) and are compounded daily, which can potentially lead to slightly higher compounding effects compared to savings accounts. |
How to decide between savings accounts and liquid funds?
Deciding between a liquid fund and a regular savings account comes down to your personal financial needs, goals, and how much risk you’re comfortable with. Liquid funds can give you higher returns and more flexibility, but they come with some market risks. On the other hand, savings accounts offer steady stability and are easy to use, though they might offer lower returns. It’s important to consider both the advantages and disadvantages of liquid funds versus regular savings accounts to make the best choice for your financial future.
This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
