Liquid Funds vs Savings Account

A brief comparison between Liquid Fund vs Saving Account

Key Takeaways

Liquid Funds are open-ended debt funds that serve as an alternative for Savings Accounts.
Interest rates offered on liquid funds is higher than those on Savings Accounts.
You can access funds in your Savings Account any time you wish, whereas liquid funds are less accessible.
You can get tax benefits on the interest income from Liquid Funds.
Savings Account entails no risk, while liquid funds are subject to market risks.

A bank offers you interest for placing your earnings in a Savings Account, and this interest rate is usually low. Now, consumers are gradually becoming aware of alternative solutions offering higher interest rates. Among many, the option that comes close to a Savings Account in terms of usage is Liquid Funds. Let us compare Liquid Fund vs Savings Account to find which one is better.

Definition of Liquid Funds

Liquid Funds are Debt Funds that invest in debt securities such as treasury bills, commercial papers, government securities, etc., and come with a maturity of up to 91 days. These Funds aim to offer high capital gains but are also highly liquid in that you can exit your investment anytime. As such, the SEBI mandates fund managers to invest open-ended Liquid Funds in high-debt money market instruments.

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Returns

Liquid Fund interest rates are determined based on market conditions. When you place money in a Liquid Fund, it has the potential to grow. In comparison, money lying in a Savings Account amasses mediocre returns, with interest rates of 3% to 4%. Some banks offer higher interest rates, provided you maintain very high average monthly balances. Conversely, Liquid Mutual Funds offer returns starting from 6%, regardless of the investment amount.

Risk

Liquid Funds are Debt Mutual Funds, typically designed to help investors minimise the inherent risk associated with market investments. That is not to say that these funds are risk-averse.. It is market conditions that result in higher returns on Liquid Funds. Therefore, Liquid Funds are subject to market risks. On the other hand, a Savings Account is considerably safe. Interest rates are fixed from the moment you open a Savings Bank Account.

Taxation

Long-term capital gains from Liquid Mutual Funds held for more than 3 years are taxed at 20%, but investors benefit from indexation. Indexation reduces your tax liability by adjusting the purchase price of the investment against the inflation rate. Short term capital gains are taxed per the income tax slab of the investor. Income in a Savings Account is devoid of indexation benefits. However, interest earned is exempt up to Rs. 10,000.

Liquidity

When we talk about Liquid Funds being highly liquid, it is usually in comparison with other Mutual Funds that are not as liquid. You cannot instantly redeem a Liquid Fund. After requesting redemption, the Liquid Fund will be credited to your bank account within 1 to 2 business days. Money in your Savings Account is at your disposal any time, any place. You can access the cash at ATMs, initiate money transfers, pay for expenses, etc. However, there may be certain limits on withdrawal amounts.

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Conclusion

Both Liquid Funds and Savings Accounts help you park your earnings. While Savings Accounts are necessary for everyone, Liquid Funds are an optional investment instrument that can help you achieve your financial goals.

Download digibank to create your savings account and choose from a range of debt mutual fund options to build wealth.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.