Why Liquid funds are an attractive alternative to Savings deposits?

liquidityfunds

Suppose you want to invest your money for a short term without any risks, the only choice that comes to everyone's mind is a savings account. Is savings account he only risk-free investment option for your money for a short-term period of less than a year? The option is no. There are a few more investment options like Liquid funds which are not only risk-free, but offer double the profit than savings deposits.

Savings Deposits

Savings deposits or savings accounts are offered by most of the banks and various institutions through which you can deposit and store your savings. The normal account that we create in banks is actually savings accounts. Anyone can create a savings account provided they must submit their KYC documents to the concerned bank. This is the most common type of investment option used by the majority of the people.

Characteristics of Savings Accounts

Let us see why savings deposits are the most popular form of investment among people,

  • Safety of Money

The money that you deposit in your savings account is completely safe. You can access it anytime using debit cards and ATM facilities.

  • A Tax Saver

Most of the banks offer an average interest of 4% per year on the money you have in your savings account. Thus, you get interest for the money you saved. Further, for upto INR 10,000 that you get as interest from your savings account, there is no tax to be paid.

These are some of the characteristics that makes everyone to open a savings account and deposit their money. Most people are not aware of other funds that offer all these features along with some extra interest on your principal amount.

Liquid Funds

Liquid funds are one form of debt mutual funds through which you can invest your money for a short term. Liquid funds are one of the safest types of mutual funds that invest in instruments like treasury bills and government securities. The maximum period of investment in a liquid fund is 90 days. Typically, people invest for an average duration of two weeks to one month in liquid funds. Since they invest in risk-free instruments, they are non-volatile to market fluctuations.

Characteristics of Liquid Funds

Liquid funds are gaining nowadays as they offer more interest than savings fund without any risk factor. As per the rules of SEBI, any investment in securities which matures in less than 60 days need not be marked to market. Mark to market means that the amount you put in any fund will change according to the current scenario of the concerned market. Thus, since these funds don't vary, the principle remains the same while the interest gets added based on the market rates. The securities in which liquid funds are invested are very safe and don't change that much. Hence any market fluctuation will not immediately alter the value of these funds. Liquid funds give average returns of 6-7% per year. This is higher than savings deposits that give just 4% per year. 

When to invest in liquid funds?

  • When you want to keep some liquidity option with you at all times, you can invest in liquid funds. The amount you invested in liquid funds can be taken before the end of that working day and the money will get credited to your account within 24 hours.
  • When you want to invest in stocks or mutual funds but in a systematic manner, then you can opt for liquid funds. These offer interest and are hence preferred over SIP for equity investment.

There are many liquid funds out there in the market. You must be careful to choose the correct type of fund. While choosing the fund, you must not only see its past returns but also other factors like total investment made, securities in which the fund is being invested etc.

The below table gives some of the top performing liquid funds in 2019. 

 All these liquid funds are direct growth plan liquid funds. You can see that they give an average return of 7.5% per year which is greater than that of savings deposits. You can also opt for a daily dividend plan, weekly dividend plan or a monthly one. Otherwise, you can opt to invest the interest profit into the funds as a fresh unit. This will, in turn, increase your profit.

Which is the best?

After comparing the benefits and returns of both savings deposits and liquid funds, we can see that liquid funds are the clear winner. They give higher returns than a savings account and also can act as a gateway to the equity market for our future investments.



Note: The source of the second table is https://groww.in/blog/best-liquid-funds-to-invest-in-2019/#How_Liquid_Funds_are_better_than_Saving_Bank_Accounts

 

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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.