Do you want to make the most of your savings? Do you know how banks give you a bit of interest when you stash your cash in a savings account? Yeah, the rate is usually pretty low. But now, you have the option to invest in both savings accounts and liquid funds to get higher interest rates. Liquid funds work like savings accounts only. This means they offer the same kind of liquidity, but often with better growth prospects! So, how do you decide where to park your hard-earned money to get the maximum return on investment? This post is here to offer some clarity. It’s time to get into the age-old debate over liquid fund vs savings account.
Let's weigh up the difference between liquid funds and savings accounts and figure out where to deposit your money for the best returns and security.
What is a Savings Bank Account?
It's just a simple bank account where you can deposit money and withdraw it whenever you need it. You can withdraw funds from this account using cheques or ATM cards. One advantage of having a savings account is that the bank pays you interest to keep your money there.
This means you can keep your money secure while also earning some extra income without having to lock it away in a fixed deposit.
What are Liquid Funds?
Liquid funds are categorised as mutual funds. They are seen as low-risk and tied to the market. They invest in short-term assets, including commercial paper, certificates of deposit, and treasury bills, making them low-risk.
Their preference is typically for debt securities, with the potential of some short-term bonds. Liquid funds often avoid investing in equities, particularly those that are high-risk. However, it is essential to note that there is still a risk connected with liquid funds.
This is because potential fluctuations in interest rates and credit risks from the fund house's assets can affect investor returns. This implies that, while they are typically less risky than other forms of mutual funds, such as equity or hybrid schemes, they don’t come without some element of uncertainty!
What is the Difference Between Liquid Funds and Savings Accounts?
Savings accounts offer guaranteed returns and immediate access to your cash, making them ideal for emergency funds or short-term needs. However, the interest rates are typically low. Liquid funds, on the other hand, have the potential for slightly higher returns by investing in short-term debt instruments. While they are also quite liquid with quick redemption options, there's a slight chance of return fluctuations due to market movements.
Here’s a crisp table mentioning the unique features of both these investment options. It can surely help you decide which one you should choose - liquid funds or savings account!
Liquid Fund vs Savings Account
| Feature | Mutual Funds | Fixed Deposits |
| Risk | Low risk | Risk-free |
| Minimum balance | Generally not required | Varies from bank to bank |
| Liquidity | High | High |
| Taxation | Capital gains tax applies based on the investment holding period. | Interest is applicable above ₹10000 |
| Lock-in period | None | None |
| Rate of return | 7% to 8% | Usually, provide around 4% |
Similarities Between Savings Accounts and Liquid Funds
Even though they're different, both Liquid Funds and Savings Accounts are important for a well-rounded investment plan. They're useful for keeping your money safe and dealing with rising prices.
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Diversifying Your Portfolio
In personal finance, it's smart to spread out your investments. Liquid funds and Savings Accounts work together to manage risk and help your money grow.
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Convenient Access
Both Savings Accounts and liquid funds let you get your money quickly. This is handy for when you need cash fast for short-term needs or unexpected expenses.
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Regulatory Assurance
Both of these financial tools are regulated. Savings Accounts are looked after by banking regulators like the RBI, and liquid funds are regulated by market authorities such as SEBI. This makes sure things are done safely and consistently.
Which One Should You Choose: Liquid Funds or Savings Account?
So, the decision between a savings account and a liquid fund is entirely up to you as an investor. Both choices are safe. However, liquid funds have a more enormous growth potential. Experts frequently advocate investing in liquid funds over savings accounts since they are more flexible and have no penalties or exit fees.
Furthermore, liquid funds often provide greater interest rates and can occasionally offer twice as much return as regular savings accounts.
Now, here's the thing: a savings account is often regarded as one of the most significant financial investments for beginners because it allows for a variety of investing activities. It's something that everyone needs!
In actuality, both of these instruments are essential for your financial development and security, so why pick just one? Instead, you might choose which basket receives the majority of your money eggs. But wait, what if you want to try new things and have the best of both worlds? Guess what? It is altogether achievable! With the Freo Savings digital account! Benefits of this account include:-
- Up to 7% interest rate
- Zero balance
- All-digital banking
- Easy access to credit facilities
- Shopping and card products
- Safety & security.
Frequently Asked Questions (FAQs)
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What are the benefits of each option?
- Savings Account: Savings accounts offer a steady and predictable interest rate on your money. Since banks are less likely to change these rates frequently, you can count on a consistent return. Additionally, savings accounts are a safe place to keep your money, as banks are insured against failure.
- Liquid Funds: Liquid funds provide the opportunity to earn a higher interest rate on your investment compared to a savings account. You also enjoy greater flexibility, as your money isn't locked in and can be withdrawn anytime with the proceeds deposited directly into your bank account.
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Who should choose which option?
- Savings Account: A savings account is ideal if you're looking for a safe place to park your money and earn some interest. It's a good option for emergency funds or short-term savings goals.
- Liquid Funds: Liquid funds are suitable for investors seeking slightly higher returns than savings accounts while maintaining easy access to their money. However, it's important to remember that liquid funds carry slightly more risk than savings accounts.
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How are they taxed?
Both savings accounts and liquid funds are taxed similarly. The interest earned is taxed as regular income according to your individual tax bracket.
