Most of us have our first savings account opened when we turn 18. Consider it a parental guidance or mental conditioning, we like to ensure that our money is safely parked at a bank. The interest on savings account has significantly declined over the years. Despite the low rate of interest, people still prefer holding a savings bank account as they gain peace of mind, knowing that they will be able to withdraw their money from the savings account anytime, anywhere.
However, not many people are aware of mutual funds as an alternative option to savings accounts. Also known as liquid funds, this type of account is offered by mutual fund companies. As an investor, you need to understand the difference between a savings account and liquid funds, weigh the options, and then consider the right investment avenue.
A liquid fund is a mutual fund, which remains invested in low-risk instruments like certificates of deposit (CD), treasury bills, government securities, and commercial papers. These instruments have a maturity period of less than 91 days. This ensures higher liquidity and allows you to withdraw the sum within three months. The investment is quite safe, although it does get affected due to market volatility. In addition, there is no exit load applicable on withdrawal from the fund and you may redeem any part of the investment within a day’s notice. These liquid mutual funds are managed by fund managers who actively try to reduce your risk and increase the returns.
Why choose liquid funds over savings account?
A savings account has always been the hot favorite amongst Indians. But with liquid funds coming to the forefront, people are gradually starting to explore the option. Here are some reasons why investing in liquid funds may be a good idea:
- High returns
Although savings account is considered as a safe investment with a fixed return, it is the falling rate of interest, which bothers the investors. The current interest rate ranges between 3.5-6%. If the interest rates keep going down, the investors may be unable to generate significant returns from their savings account. On the contrary, in the case of mutual funds, the risk is relatively high since it is impacted by the movement of the market. The net asset value (NAV) of the fund constantly changes and your purchase price may be affected accordingly. However, the returns in case of liquid funds are high as compared to savings account. They have generated an average return of 8% in the past, which is almost double than that of a savings account.
- Tax benefit
Mutual funds have a tax benefit. The short-term capital gain in case of a liquid mutual fund is taxed as per the income tax slab of the investor and the long-term capital gain is taxed at 20% with indexation.
- High liquidity
Liquid funds don’t have any lock-in period. Also, neither is there an entry load nor any exit load on liquid mutual funds. As such, these funds rank high in terms of liquidity. They may be redeemed within 24 hours, provided the following day is not a holiday or a Sunday. Else the amount gets credited to your account on the next working day.
How to choose a fund?
Investing in liquid funds is a quick and simple process, but you need to follow a few steps to choose the right fund:
- Understand the different funds in the market.
- Analyse the NAV and returns on funds.
- Look at the past performance of funds and learn more about their returns. Although the returns from most funds are quite similar, it makes sense to choose the fund, which has performed well in the last five years. The risk will remain low and the return-generating capacity will be high.
- Invest according to the liquidity you need.
Investors believe that individuals who have a habit of setting aside funds in the savings account for a contingency may start investing in liquid funds. It allows quick redemption, is easy to maintain, and offers higher returns.
But in most cases, individuals do not see liquid funds as an alternative because they are not aware of the way it functions. You may seek help from your fund manager to advise you on the best liquid funds or you may also use the Angel Wealth mobile application. It works on an ARQ investment engine to offer personalized recommendations. The application is user-friendly and is free of human intervention; it will help you make an informed decision to choose the best liquid fund. So download the app today and invest anywhere, anytime.