What is the difference Liquid funds vs. Savings accounts?

Short Answer

Based on return liquid funds outperform savings account by anything between, 2-4 % points which is 50-100 % higher return than the savings account. So, purely on the basis of returns investing in liquid funds seems a better option.

Detailed Answer

One of the important questions on financial planning is, Should I move my money from savings account to Liquid funds? Here, we try to answer this question. Before that, lets try to understand why do people keep money in savings account , for me there are 3 reasons:

  1. To ensure liquidity , so that money can be used whenever required.
  1. Get some returns as money in the bank is more secure and gives some basic returns in the pocket.
  1. Financial laziness where you don't worry about what your money does in your account.

So let's look at how much interest rates you earn on savings accounts with different banks , below is the current saving bank interest rates offered by different banks

Saving Bank Interest Rates

Bank Name with Interest Rates offered

  • ICICI Bank 4% p.a.
  • Kotak Mahindra bank 6% p.a
  • SBI 4% p.a.
  • HDFC bank 4% p.a.
  • Axis bank 4% p.a.

If you look at most of the top saving banks give interest rate in the range of 4-6 %

Now let's look at yearly return on top liquid Funds in last one year to get an idea on how they fare as compared to your favorite savings account, below table summarizes the data, please note I have only taken top 5 funds as per Crisil ratings.

Top Liquid funds returns

Fund Name with Annual Returns

  • Indiabulls Liquid Fund 8.20%
  • L&T Liquid Fund 8%
  • Tata liquid Fund 8%
  • Axis Liquid Fund 8%
  • HDFC liquid fund 8%

So simply based on return liquid funds outperform savings account by anything between, 2-4 % points which is 50-100 % higher return than the savings account , so purely on the basis of returns investing in liquid funds is a no brainer.

Now lets look at other big concern liquidity, one of the reason keep money in savings account is on the go liquidity you can withdraw money at any time, through an ATM or from the bank, Liquid funds also provide similar kind of liquidity. Liquid funds can be redeemed at any time with no exit load and the funds hit your account in 24 hours. Some AMC's like Reliance also provide ATM cards powered by HDFC bank, where you can redeem the money.

So all in all Liquid funds have high liquidity and can compete with savings account on that front.

Risk Assessment :- Liquid funds invest in short-term securities mostly with maturity of 91 days , normally interest rates do not change too much in short term, hence interest rate risk is taken care of , so liquid funds do not carry much risk

So, experts advise not to keep more than 1-2 months of your planned expenses in savings account. You can move rest of the money to liquid funds and develop your emergency funds for 5-6 months using liquid funds but based on your risk profile and priorities.

Tagged With: liquid fundssavings accountliquid funds vs savings accountmutual funds
Categories: Mutual Funds
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