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:
- 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.
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.
- 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.
- 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: 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.
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.