Are you considering investing in a money market fund that provides liquid assets instead of keeping your money in a savings account? Knowing the differences between these two options will help you to choose a location of your assets with more knowledge. Many investors have found that a more effective approach to boost their savings is to transfer their money from a traditional savings account to a liquid mutual fund program. Go on reading to discover more about the reasons this approach can help you.
Liquid funds are usually a better option than savings accounts if you are looking for more returns, especially on bigger sums, and are ready to tolerate somewhat smaller liquidity. For more significant volumes especially, this is especially true. Conversely, savings accounts are a great option for emergency money and savings with a very short-term time horizon because of their fast access and enhanced safety they provide.
Top 10 – Are Liquid Funds Better Than Savings Accounts?
For several reasons—the most significant of which is their low risk, great liquidity, and return on investment—liquid mutual funds might be a better option than savings accounts.
Higher Returns Compared to Savings Accounts
Liquid funds usually provide better ones, although conventional savings accounts usually provide smaller returns. Often yielding more than the interest rates provided by personal savings accounts, they invest in short-term, money market items such certificates of deposit and commercial papers. While the rates on savings accounts are normally set and not influenced by market conditions, the returns on liquid assets could vary depending on those factors. One should bear this difference in mind.
Convenient Access to Funds
Depending on the rules of the fund, one to three business days allow one to withdraw money from liquid funds. This kind of fund lets you access your investments in a quite handy way. Savings accounts not only give easy access to funds free from penalties but also let one immediately withdraw money, which makes them somewhat more helpful for daily needs.
Minimum Balance Requirement
Though there is usually a minimum investment amount needed, most investors can fairly afford liquid cash. Conversely, for savings accounts—especially those which let for interest deposits—there may be a minimum balance requirement.
Risk Considerations
Generally speaking, savings accounts are low-risk investments since, up to a threshold of Rs 5 lakh, deposit insurance policies sponsored by the government safeguard them. Conversely, liquid funds are connected to the market and could be vulnerable to changes in their Net Asset Value (NAV), so causing minor losses in times of erratic market conditions. Though usually small, the risk connected with liquid cash is nonetheless more than that of a savings account.
Expense Ratio
Charging an expense percentage to the fund manager helps you to manage liquid money. This is usually less for liquid funds as compared to other stocks mutual funds; nonetheless, it is still there. Conversely, savings accounts have no expense ratio; yet, some transactions—such as withdrawals from an ATM exceeding a limit or account maintenance—may result in fees from specific financial institutions.
Interest Rate Fluctuation
Liquid funds are those whose returns vary depending on the state of the market, including the inflation rate and the interest rates. Though they vary based on central bank policy, the interest rates on savings accounts are usually more consistent than those on other accounts.
Consequences for Taxation
Under the category of “income earned from other sources,” savings account interest is liable to taxes. The length of time you maintain the mutual fund units under your control will dictate the tax due on any capital gains from a liquid fund.
The Horizon of Funding
Liquid funds are the greatest choice for short-term investments (up to three months) when you still desire more returns than you would with a savings account yet safety and liquidity are of great importance. Savings accounts, on the other hand, are perfect for circumstances when the immediate access to money is more important than profits, say when funds are needed for an emergency or for very temporary needs.
Variations in Portfolio Decisions
One of the main benefits of liquid funds is the ability to diversify your investing portfolio, therefore helping you Investing in liquid mutual funds will let you spread your money throughout a broad spectrum of asset types. This can help you lower risk and maybe boost your investing earnings. Savings accounts are a particular kind of investment, hence this decision is not possible there.
Convenience for Large Sums
Liquid funds are a better choice than savings accounts when it comes to holding large amounts of money for brief periods of time while obtaining a higher return than they offer. Conversely, even if they are more convenient, savings accounts often provide returns on substantially more money than liquid funds on far lower amounts.
Should You Consider Investing in Liquid Funds Instead of Keeping Money in a Savings Account?
Given the comparison between liquid funds and savings accounts, it is likely that, if you want to raise your savings over time, liquid funds are the better option. You should consider the unique qualities of savings accounts, including the ability to access funds immediately and the lower risk associated, before making the transfer, though, and decide whether or not you are able to forsake those benefits. You can keep a savings account and invest in liquid funds at the same time, so this is not a decision between two choices. One should keep this under constant awareness.
Conclusion
Analyzing your financial goals and the features you need either from a savings account or a liquid fund can help you decide which sort of savings account to choose from. Once you have a greater awareness of both options, you will be able to make a more informed selection compliant with your financial situation and investing plan.