Is liquid fund a better alternative to savings account?

Liquid Fund is a type of Debt Mutual fund. It invests in instruments like treasury bills, certificate of deposits, commercial papers, government securities, inter-bank call money and term deposits.

Dec 10, 2017 11:12 IST India Infoline News Service

Mutual Funds
Savings bank account have been people’s favourite for decades. That has garnered everyone’s trust when it comes to accumulation of funds. But with the advancement in the sector of banking and finance, further new options have been opened up where you can choose the best-suited option for your investment. Before comparing Liquid Funds with Savings Account to term it as a better alternative or not, it is important that we get into the basics of Liquid Funds.

What are Liquid Funds?
The liquid fund is a type of Debt Mutual fund. It invests in instruments like treasury bills, certificate of deposits, commercial papers, government securities, inter-bank call money and term deposits. The maturity tenure of Liquid Funds is less than a quarter. It provides
safety and liquidity at the same time with moderate returns.

The risk attached is comparatively lower as the fund manager deals in high credit rating securities within the portfolio. These come in various options like weekly, monthly, quarterly etc.

Liquid Funds vs Savings Account
Following is a comparison between Liquid Funds and Savings Account in different aspects:
  • Interest Rates:
    • Liquid Funds: The interest rates provided in the Liquid Funds are variable according to the market but are generally higher than those offered by other schemes. These vary on a daily basis as per the market activities.
    • Savings Account: The interest rate for a Savings Account remains constant until the maturity, but this generally remains on a lower side.
The interest rate is higher in Liquid Funds than in a Savings Account.
  • Net Asset Value (NAV):
    • Liquid Funds: The Net Asset Value of the Liquid Funds is variable and fluctuates on a daily basis as per the market activities.
    • Savings Account: While the Net Asset Value remains constant for the Savings Account until the maturity period.
The Net Asset Value of the Liquid Funds is variable, but it remains constant for Savings Account until the maturity period.
  • Risk Quotient:
    • Liquid Funds: Although the risk quotient of the Liquid Fund ranges from lower to moderate but still is higher as compared to Savings Account.
    • Savings Account: There is no risk involved in Savings Account as the rate of interest remains constant, though the returns are much lower.
The risk quotient though in general ranges from low to moderate for Liquid Funds but at the same time remains higher relative to Savings Account, as there is no risk involved in the Savings Account.
  • Annualized return:
    • Liquid Funds: Even after fluctuations of NAV on a daily basis the annualized returns of Liquid Funds average between 8-8.5% roughly.
    • Savings Account: While the annualized returns of a typical Savings Account falls between 4-6% roughly.
Liquid Funds have higher annualized returns on an average despite the fluctuations of Net Asset Value as compared to the Savings Account.
  • Lock-in period:
    • Liquid Funds: There is not Lock-in period for the Liquid Funds. So, you may withdraw your capital any time you feel so.
    • Savings Account: In many of the Savings Account there is a lock-in period especially when you opt for Fixed Deposits.
Liquid Funds have no Lock-in period as that of Savings Account. This makes Liquid Funds much more flexible for you to invest your capital in.
 
The liquid fund is a better alternative to a savings account:
The Liquid Fund is definitely a better alternative to a Savings Account. With Liquid Funds, you not only enjoy the perks of higher returns but also has the flexibility of no lock-in period. Though there is a little risk in Liquid Fund due to Net Asset Value fluctuation, it is still preferable due to better returns. Thus, investing in the Liquid Fund is a better alternative to the conventional Savings Account.

Liquid Fund, Debt Mutual Fund

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