Liquid Funds Or Savings Bank Accounts? Where To Park Your Surplus Funds!

Divya Nair

25 Oct 2016

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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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Liquid Funds Or Savings Bank Accounts? Where To Park Your Surplus Funds!

Divya Nair

25 Oct 2016

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.

Have Referral Code?