Savings account vs liquid fund: Which is better for you to keep money?

Depending on one's financial position, requirements, larger financial goals and risk tolerance, both saving accounts and liquid funds can be beneficial

With numerous savings schemes and options in the market, it can be difficult to decide what gives the best interest. What’s apt for X, may not be right for Z. What constitutes as ‘best’ can also change with time and age, depending on where one is financially posed in their life and how comfortable they are with diversifying their finances.

Savings account

Bank savings accounts enable customers to deposit and save money while earning interest on their savings.

Account holders have to maintain a minimum amount set by the bank in their account in order to receive the interest on their savings. Other than that, people are free to deposit and withdraw money as they wish using an ATM card or directly withdrawing from the bank.

 

Saving accounts in India are also backed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India. The DICGC provides deposit insurance for up to Rs 5 lakh per depositor in case of bank failure, protecting the funds to an extent.

Interest gained from a savings account is exempted from tax for up to Rs 10,000 during a financial year.

This has been a popular option for storing funds in a bank. It allows customers to deposit and save money while earning interest on their savings.

This ease of access and minimal interest allows saving to slowly grow without a large risk.

As fintech as grown in popularity, increasingly more people, especially the youth, have shown an interest in investing their surplus funds instead of saving. This has made liquid funds a popular option, especially for those who are testing the waters of investment or are looking for short-term low-risk opportunities.

Liquid funds

They are a type of mutual fund with low risk and providing investors with high liquidity and safety of capital. They are suitable for individuals and organisations looking to invest in short-term, ranging from a few days to months.

The benefit of liquid funds over savings accounts is that it allows the generation of reasonable returns and at the same time investors can access their funds quickly. Depending on the investment, funds can be taken out in a matter of days.

This makes them a preferred choice for parking surplus funds or meeting short-term cash flow requirements.

Liquid risk, low though, arises from credit risk and interest rate fluctuations. However, due to the short duration of the underlying instruments, the impact of interest rate changes is minimal. Moreover, liquid funds aim to maintain a stable Net Asset Value (NAV) of Re 1 per unit, which helps in preserving the capital invested. The returns from liquid funds are generally modest but are typically higher than those offered by traditional savings accounts.

In terms of taxation, the gains from liquid funds held for more than three years qualify for long-term capital gains tax with indexation benefits. However, if the investment period is less than three years, the gains are treated as short-term capital gains and are taxed at the investor's applicable income tax rate.

As with any investment, it is essential to carefully evaluate the fund's track record, expense ratios, and reputation of the fund house before investing in liquid funds. It is advisable to consult with a financial advisor or do thorough research to make informed investment decisions based on individual financial goals and risk tolerance.