Liquid Funds Are Better Than Savings Account – Here’s Why

Liquid fund vs saving account

Liquid Funds are better than Savings account.

Every once in a while, you must have given a thought about how you should be spending your surplus money. The thought is usually accompanied by another one, which focuses on having more money, by investing somewhere and generating amazing returns. But somewhere along the line, you want you money to be available whenever you need it.

Sure, the first option is to store your surplus money away, in a bank. It is the most rational idea one could ever have. On signing up for a bank account, you have two options: A savings account, or a fixed deposit account.

Typically, a savings account is liquid without any significant returns, while a fixed deposit gives high returns but without being liquid. How do you find a solution that is both liquid and high rewarding?

The solution is to invest in Liquid Funds. But what are  liquid funds?

Liquid funds are a type of debt mutual funds which primarily invest in money market securities for very short period of time. As the name implies, these funds have high liquidity and the returns are less fluctuating since these funds invest in securities which are maturing in very short-term.

But how does it compare to a normal savings account?

A typical savings account is accompanied by a way to store your money safely and gain interest. It also has a few more advantages like being liquid, ability to make online payments and making transferring money from one account to another. But it has one major drawback that everyone agrees with – Return On Investment. Although you get interests from a savings account, it is very low, compared to other options. 

With a Liquid Fund plan, you have a great solution. You have the ability to obtain a great return on investment, and also have the option to be extremely liquid, that is, have your money any time you wish. Investing in a liquid fund is a much sensible option since it has everything one could ask for, with your money being safe. The following table may help you with understanding this concept on an infinitesimal level.

For a savings account with Rs.100,000 for a period of 40 days, this is the way a Savings account and a liquid fund scheme differs:

 Liquid funds vs savings accounts comparision

Interest Calculation

A huge contingent of people who have an ordinary savings account get paid for ‘keeping’ money in the account. A lot many of them know the exact amount that gets credited to their account. But not many people know in detail the process of interest calculation and the way it gets credited.

The interest credited to your account is calculated taking into consideration three factors, namely:

Principal : This is the total amount deposited in the account.

Number of Days: The total number of days for which the amount has been deposited in the account.

Interest Rate: The rate of interest on a day, which is usually denoted in a percentage format.

In simple words, the interest is calculated using the formula:

Interest = Principal * Number of Days * Interest Rate.

Typically, a bank may set the interest rate anywhere between 4% to 6%. With effect from 1st April 2010, the RBI deregulated the interest calculated on savings account which permitted banks to set their own rate of interest on the savings bank account.

Ever since the RBI deregulated the interest rates, it has been a win-win situation for customers. It has practically raised the competition level between banks, which has led to them offering more interest rates, which directly benefits the customers.

But again, it is not the entire picture. While it may look appealing from the outside, it is not quite so when you delve deeper into the story. While it may be beneficial for a few, it is certainly not beneficial for middle-sized investors. The banks impose certain conditions on customers having a regular Savings Account. While the banks may offer a 6% interest rate, it comes with the baggage of having to maintain your bank account against a set of pre-determined rules and conditions. One may have to fulfill the following conditions to get the maximum returns on investment:

1. Have a certain minimum balance

2. Have the savings account for a certain period of time

The interest rates for most banks are set at 6% per annum, on a condition that the minimum balance should not dip below Rs.100,000. If the balance dips below the amount, you are not eligible to get the interest at 6%, but at a lower rate. It also depends on the area you reside in; for rural areas, the minimum amount is relatively lower than the urban ones. The interest rates also differ on the amount that you deposit in. For an amount less than Rs.1 Crore, the interest rate is lower, while for an amount higher than Rs.1 Crore, it is significantly higher. A normal customer may have his/her amount in the middle category, and may very often end up with not a great return on investment.

Also, for a Savings Account, you need to have the minimum balance for a minimum of 40 days. This may not be of huge concern to many, but for those who wish to have their money parked for short period of time, this is extremely unsuitable. They may lose out on interest, and may end up with zero returns on investment.

How Liquid Funds Benefit More

The best and the safest alternative to this solution is, investing in a liquid fund scheme. As explained above, you don’t need to worry about the money, since it is extremely safe. Also, it is much more liquid than a typical Savings Account. By investing in a liquid fund, you can get a redemption of your money along with a return on investment, which typically lies in the 8-9% range. In a liquid fund scheme, you do not have a minimum amount or duration to park your money; you are free to do so with whatever money or time you are comfortable with. There are verified reports of multiple individuals who have invested their money in liquid fund schemes and walked away with a 8-9% returns upon redemption.

In conclusion, if you wish to have to have a liquid withdrawal option for your surplus money with greater returns on investment and lesser terms and conditions to abide by, it is better to opt for a Liquid Fund Scheme.

Traditionally, you have two ways to invest in a liquid fund – either you invest directly, or get some help from a broker or an agency. If you opt for the latter, you may have to pay some commission.

With the WealthTrust App, you can invest directly without the need of a third-party broker or agency, thereby saving you quite a bit of money. In fact, it helps you save about 1.5% every year. The entire process is paperless, which in turn makes transactions across multiple schemes lightning quick. It is easy and hassle free.

In a nutshell, you can save more by investing money wisely, with the WealthTrust App.

What are you waiting for? Download the WealthTrust App today, and start saving more!

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