Liquid funds and savings account: How are they different?

Picture this scenario: you've just received your annual bonus after months of hard work, and you're unclear between parking it away in a savings account or exploring other investment avenues. One of the suitable alternatives to a savings account could be investing in liquid funds. Here, we will take you through the details of both liquid mutual funds and savings accounts, highlighting their features and differences, that may ultimately help you make an informed decision.

Table of contents

• What is a savings bank account?
• What are liquid funds?
• Difference between liquid funds and savings account
• Liquid fund vs savings account: Which one to choose?
• FAQs

What is a savings bank account?

A savings bank account is a financial vehicle most of us are familiar with. It is a basic bank account where individuals can park their surplus funds, offering easy accessibility and minimum risks. Banks also offer interest to the account holders for choosing to keep their money with them.

What are liquid funds?

Unlike savings accounts, liquid funds come under the category of mutual funds. They are market-linked instruments that invest in short-term, highly liquid instruments such as treasury bills, certificates of deposit, commercial papers, and even short-term bonds. They invest in instruments up to 91 days. They avoid investing in stocks or any other high-risk instrument, making them a viable choice for investors with low risk appetite. Liquid funds are managed by Assets Management Companies (AMCs) or fund houses. Liquid funds have the potential to offer relatively better returns than savings account along with the flexibility to access funds swiftly.
Having said that, the returns on liquid mutual funds are always at a risk of changing and there is no assurance of returns on liquid funds. Additionally, there is credit risk that can impact the potential returns earned by investors.

Difference between liquid funds and savings account

• Returns
  This is one of the major differences between liquid funds and savings accounts. The interest that an account holder can earn from his savings account is usually lesser than the returns from liquid funds. However, it must be noted that since the returns in case of liquid funds are market-linked, profit is not guaranteed.
• Liquidity
  Both savings accounts and liquid funds offer a certain level of liquidity. With a savings account, you have the freedom to withdraw money at any time through various channels such as ATM withdrawals, online transfers, or bank visits. Liquid funds, although not as instantaneous as a savings account, typically provide redemption proceeds within T+1 business days. However, liquid funds also provide an option of insta-redemption wherein up to Rs. 50,000 or 90% of your investments, whichever is lower, can be received by you within few minutes of undertaking transaction of insta-redemption.
• Risk and safety
  Savings accounts are considered low-risk instruments. On the other hand, while liquid mutual funds are relatively stable due to their investment in highly rated debt instruments, they do carry a certain degree of market risk. However, it’s important to note that liquid funds are regulated by the Securities and Exchange Board of India (SEBI) and have strict investment guidelines to ensure relative stability to investor’s investments.
• Diversification of investment
  When you keep your surplus money in a savings account, your funds are parked with a single bank. On the contrary, liquid funds build a diverse portfolio by investing in various money market instruments issued by different entities.

Liquid fund vs savings account: Which one to choose?

The choice between liquid funds and savings accounts ultimately depends on your financial goals, risk appetite, and liquidity requirements. If you prioritize safety, easy accessibility, a savings account might be the suitable choice. It offers peace of mind and allows you to withdraw funds whenever needed.
However, if you are willing to take a little risk with a vision of relatively better return potential, then a liquid mutual fund can be a suitable option. It's important to evaluate your short-term and long-term financial goals and consider your emergency fund requirements before making the final decision. Consulting with a financial advisor can also provide valuable insights based on your specific circumstances.

Conclusion
There is no straightforward answer for whether to choose between a savings account and liquid funds. Both the options have their pros and cons. While liquid funds can provide better return potential, savings accounts offer easy access to liquidity. An investor must consider factors like returns, liquidity, risk, and safety before choosing either of the two.

FAQs

What is the difference between liquid funds and a savings account?

Liquid funds are a type of mutual fund that primarily invests in short-term debt securities with a maturity period of up to 91 days. Whereas a savings account is a bank account that allows individuals to deposit and withdraw money while earning interest on the balance.

Which option offers higher returns: liquid funds or a savings account?

Liquid funds generally have the potential to offer higher returns as compared to savings accounts. Investing in Bajaj Finserv Liquid Fund can help investors meet their short-term investment needs. This scheme aims to provide the investors with a steady income with the preservation of capital, lower risk, and high liquidity. However, it's important to note that unlike savings accounts, liquid funds are subject to market risks, and returns are not guaranteed.

How accessible is the money when you invest in liquid funds compared to a savings account?

Liquid funds are designed to provide easy access to invested funds. In most cases, you can redeem your investment and receive the funds in your bank account within T+1 business days. Additionally, liquid funds also provide option of insta-redemption, wherein up to Rs. 50,000 or 90% of your investment, whichever is lower, can be received by you within a few minutes of undertaking insta-redemption transaction. On the other hand, savings accounts offer immediate access to your money through various channels such as ATM withdrawals, online transfers, and debit card transactions.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.