If you want to park your capital, liquid mutual funds might be a more attractive option than savings accounts. This is because they offer liquidity, safety, and higher returns. Such benefits make them a compelling choice for short-term investment needs. Discussed here is more about liquid funds and how they outperform savings accounts.
Liquid mutual funds
Liquid funds are debt mutual funds that invest in market securities with a short-term maturity. These instruments include treasury bills, commercial papers, and certificates of deposit. They have a maturity period of up to 91 days.
Savings account
Savings accounts let you deposit money with financial institutions. You earn an interest component on such deposits. Also, they offer quick access to your funds via ATM withdrawals.
To better understand the difference between liquid funds and savings accounts, here’s a comparison based on key parameters:
- Returns
The strength of liquid mutual funds lies in their ability to generate higher returns than savings accounts. Savings accounts generate interest rates between 2% and 4%, reaching up to 6% for senior citizens.
Liquid funds can offer annual returns of 6% to 7%. Over time, this difference can significantly impact returns, especially with substantial amounts.
- Liquidity and accessibility
Both liquid mutual funds and savings accounts are highly liquid, but they differ in accessibility. Savings accounts provide immediate access to your funds through ATMs, online transfers, and in-branch transactions.
Liquid funds require a redemption request, with capital typically available within one to two business days.
- Risk profile
Savings accounts are risk-free options, managed by financial institutions.
Liquid funds are low-risk investments as they invest in short-term, high-grade debt securities. Their short maturity minimises exposure to interest rates and credit risks. Owing to their minimal market risk, they serve as a suitable choice for conservative investors seeking better returns.
- Flexibility
Liquid mutual funds ensure flexibility in terms of investment size and tenure. They have no minimum balance requirement and permit partial redemptions without charges.
However, savings accounts though allow quick withdrawals, tend to have a minimum balance requirement and may impose withdrawal limits.
- Cost and expense ratio
Liquid funds tend to have a low expense ratio, ranging from 0.1% to 0.5%, which covers fund management fees. While this expense is minimal, it slightly lowers returns.
Savings accounts have no direct investment cost, but financial institutions may levy fees for non-maintenance of balance, ATM withdrawals, or other services. Moreover, inflation can erode the actual value of savings account returns over time. Liquid funds despite their expense ratio, usually offer better inflation-beating returns.
Ending note
Liquid mutual funds come across as a compelling alternative to savings accounts by offering higher returns while maintaining liquidity and safety. Their low risk, flexibility, and inflation-beating potential make them a smart choice for short-term investments.
While savings accounts ensure instant access, liquid funds offer a balanced approach to optimising idle capital with better growth potential.
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