Liquid Funds Or Savings Bank Accounts? Where To Park Your Surplus Funds!
Both savings bank account and a mutual fund liquid account are considered as ideal routes to park money for a short period of time. Each one of us want some amount of idle money for our day-to-day expenses. But it is critical to determine how much money is sufficient to meet our short-term needs to enable our idle money to earn returns for us. Without a proper analysis, both liquid funds and savings accounts might look alike. But if looked closely, there can be a number of significant differences between the two that may give you solid reasons to choose one over the other.
The first step towards evaluating these two is to understand what exactly they are.
What Are Liquid Funds?
Liquid funds are debt mutual funds that invest in very short-term instruments — commercial papers, treasury bills, certificates of deposit, and so on for a tenure of 91 days. As the term implies, liquid funds are highly liquid. A person can invest today in liquid funds and can redeem the money tomorrow. There may not be any exit load and the amount will be transferred into his bank account.
What Are Savings Accounts?
These accounts are one of the most favored money saving instruments among Indians. People park money in a savings account for short-term in order to use it for day to day needs. Savings accounts are maintained by banks and post offices where people have the flexibility to deposit and withdraw money at any time.
A Relative Comparison Between Savings Accounts And Liquid Funds -
| Factors | Liquid Funds | Savings Funds |
|---|---|---|
| Rate of Return | 7-8% | 4% |
| Tax Implication | Short-term capital gains tax is levied based on investors’ applicable income tax slab tax rate | Interest earned are taxable as per investors’ applicable income tax slab |
| Ease Of Operation | No need to go to a bank to get cash. If there is some amount that needs to be paid, it can be done online | Money gets deposited to bank account first |
| Suitable For | Who want to invest their surplus to earn higher return than saving account rates, but seek high liquidity | Who want to just have a storage to park money |
Conclusion - While it entirely depends on investors’ preference whether to go for liquid funds or sticking to their savings bank accounts, shifting their idle money in savings account to higher returns yielding liquid funds can always be a smart decision.
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