Whether you are a cautious person or a penny pincher, a big chunk of people put extra money in a bank savings account for safekeeping. The best part is that not only can you keep it in a secure place, but you can also access it anytime, anywhere. However, there’s a problem—your money earns very little interest, and by the time it grows, it’s usually too late to make a real difference. That becomes an issue when you suddenly need a large amount of money and don’t have it ready at hand, leaving you with regret and a problem unsolved. Luckily, there’s a solution for the problem you may face in future—Liquid Mutual Funds! Liquid funds offer better returns compared to bank savings accounts.
What are Liquid Mutual Funds?
Liquid funds are a type of mutual fund that puts your money into very short-term investments such as government bonds, treasury bills, or bank certificates. These investments usually last only up to 3 months which means they mature quickly, so the fund always has cash ready. Because the duration is so short, liquid funds are seen as low-risk and very safe. The best part? You can take your money out quickly. Liquid funds offer better returns than traditional savings methods.
What Falls Under Liquid Funds?
- Treasury bills: Loans you give to the government for a short time. You buy them at a low price and get full value back with a small profit.
- Government securities: IOUs from the government for a slightly longer term than treasury bills. You lend money to the government and get paid back with interest.
- Certificates of deposit: Like fixed deposits but issued by banks. You give money to the bank for a short period, and the bank pays it back with interest.
- Commercial papers: Short-term IOUs issued by big companies. Companies borrow from investors and repay quickly with interest.
They are designed to be low-risk and highly liquid, meaning you can redeem your money quickly, usually within 24 hours.
Why Bank Savings Accounts Fall Short
Savings accounts are convenient, but their interest rates typically range from 2.5% to 4% per year in India. Even premium accounts rarely beat inflation. This means that while your money is safe, it’s not really growing and the purchasing power may decrease over time.
How Liquid Funds Perform Better
Liquid funds usually offer 5% to 7% annual returns, higher than savings account interest. Liquid funds offer better returns consistently while maintaining safety and liquidity. Here’s why:
- Better Returns: Historically, liquid funds have given nearly two times more returns than bank savings accounts.
- Low Risk: They invest in high-quality, short-term instruments, making losses unlikely.
- Quick Access: Redeem your investment and get money in your account the next working day. Some funds allow instant redemption for small amounts.
- No Lock-In: Unlike fixed deposits, liquid funds have no lock-in period. Withdrawals up to ₹50,000 can be received within one hour, while larger amounts are typically credited within 24 hours from Monday to Friday.
- Tax Advantage for Some: For higher tax brackets, liquid funds can be more tax-efficient depending on the holding period.
Example
Suppose you keep ₹1,00,000 in a savings account at 3.5% interest. After one year, you will have about ₹1,03,500. If the same amount is invested in a liquid fund at 6% return, you will have around ₹1,06,000. That’s ₹2,500 extra in just one year, with almost the same level of safety and liquidity.
Conclusion
If you have extra money lying in your savings account, it is wise to shift it to a liquid fund. You will still have easy access to your money while earning higher returns. While liquid funds are not completely risk-free, they are considered one of the safest mutual fund categories.
In short, if you want your money to work harder while still being available anytime, liquid funds offer better returns and beat savings accounts hands down. To get started, seek guidance from the best mutual fund distributor in Vijayawada and begin your investment journey.