One should always have a contingency fund for financial security that can take care of a person’s expenses for around three to six months. The contingency fund can help an individual tide over the short-term loss of income or an unfortunate incident that can be caused by loss of a job, a pandemic, a hit in the business, extended leave due to some illness, etc. It can also help meet unforeseen circumstances without hampering your investments. But where should you store your surplus funds? This article will draw out the differences between two common forms of investments for short-term parking of funds – liquid fund and savings account. Let’s understand which is the best-suited investment for you.
A savings account is one of the most traditional options for storing your surplus funds. A savings account is nothing like an investment account. It merely ensures that the depositor’s money is liquid at any point in time. If like most of the investors you have been in the dark that keeping your money in a savings account is the safest and guaranteed way of ensuring liquidity, you might want to think again. You’d be surprised to know that liquid mutual funds come very close to a bank savings account, albeit some additional advantages.
But what is liquid fund?
Liquid funds are a type of mutual funds that primarily invest money in very short-term money market instruments such as government securities, treasury bills (T-bills), Commercial Paper (CP), Certificate of Deposit (CD), etc. These mutual funds have a residual maturity of up to 91 days. Liquid funds provide a high level of liquidity and safety of the capital invested to investors. What’s more, liquid funds do not have any exit loads.
Comparison between Liquid funds vs Saving Account considering various factors
Savings account are the only investment option that offers risk-free returns. Though you are assured of the returns credited to your account, the average rate of return is very low – barely 3-4%. Of course, there are a few bank accounts that offer interest rates as high as 6% p.a., but these banks usually have a high minimum account balance to maintain.
On the other hand, a liquid fund offers higher returns than a bank savings account – around 7-9% p.a. Plus, these funds are no strings attached – you do not need to maintain a minimum account balance or invest for a minimum duration. In short, liquid funds have the potential to offer higher returns than a traditional savings account.
Liquid funds enjoy lower tax expense owing to the benefit of indexation. Long-term capital gains (LTCG) on liquid fund schemes is taxed at 20% with the benefit of indexation.
On the other hand, the interest on income of savings account is exempt from tax up to Rs10,000.
In short, Liquid funds help investors to earn a higher rate of interest as compared to savings investment, along with providing high liquidity at considerably low risk. Whether you choose to invest in mutual funds or not, solely depends on your personal and financial goals. Happy investing!