Every one of us must have an emergency fund to meet urgent financial needs. But the question is where to keep this fund. Traditionally, all of us keep this in a bank savings account and earn interest thereon. But in today’s time, liquid mutual fund is another popular alternative to keep your surplus money.
You may have several questions regarding the expected rate of return and risks, liquidity, lock-in period, etc. to know are liquid funds better than a savings account. Which one is the most suited for you depending on your financial goal, risk tolerance capacity, and financial requirements?
Read our full article to know the difference between liquid funds Vs savings bank account and figure out which one is better and offers greater returns.
What is a Saving Bank Account?
Traditionally, keeping money in a bank saving account is the most preferred method. All of us have a saving account with an Indian bank. We have to keep a minimum balance in the savings account; the limit may be different across banks. In return, banks offer a fixed rate of interest on our deposits in the savings account.
Savings accounts in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India. The DICGC provides deposit insurance of up to 5 lakhs per depositor in the event of a bank failure, protecting funds to some extent. Account holders must maintain a minimum amount in their account, set by the bank, to earn interest on their savings. They can also deposit and withdraw funds at will, using an ATM card or withdrawing directly from the bank. This easy access and minimal interest rates allow savings to grow slowly without much risk.
What is a Liquid Mutual Fund?
Liquid Fund is a low-risk debt mutual fund that invests in debt or fixed-income instruments such as commercial paper (CP), bonds, treasury bills (T-bills) and government securities upto 91 days of maturity. The fund manager invests in these securities on behalf of its investors. They are also referred to as money market funds. They are suitable for those who have idle cash and do not need the funds for another 4 to 5 months. Investing in liquid funds helps you achieve short-term goals.
Liquid funds are not tied to a specific time limit, so you can redeem your liquid fund’s units at any time because it is open-ended funds type investment. Also, there is no exit load, but you must pay taxes on the short and long-term capital Gain.
Know the difference: Saving Bank Account V/s Liquid Funds
Before parking your idle cash in any one, check out what are the differences between liquid funds and savings bank account
| Basis of difference | Saving Bank Account | Liquid Funds |
| Minimum Balance | Minimum balance is required | No minimum investment required |
| Rate of Returns | Low Return, most of the banks may offer 3.5%-4% annual interest on deposits in savings account. | It offers high Returns, most of the liquid funds offer 7%-8% of annual return. |
| Risk | Keeping money in a saving account is risk-free. | As it held an investment in debt securities which is subject to interest rate risk and credit risk. |
| Liquidity or accessibility | As it held an investment in debt securities which is subject to interest rate risk and credit risk. | You can place a redemption request to withdraw money which will take 1 day to get credited into your bank account. |
| Taxation | Section 80 TTA, No tax on interest-earning less than Rs 10,000. | Capital gain tax including short-term capital gain at applicable income tax slab and long-term capital gain with indexation benefits are levied. |
| Lock-in period | No lock-in-period. | 1 Day lock-in-period |
| Principal Guarantee | A government-backed guarantee up to Rs 1 Lakh | No Guarantee |
Taxation on Liquid Funds Investment
For Capital Gain, you have to pay tax. Capital Gains Tax on liquid funds is defined below:
1. Short-Term Capital Gain Tax on liquid MF;
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If you invest in the liquid funds for less than 3 years then on redemption of the units you have to pay the short-term Capital Gain Tax. And it depends on your income tax slab which varies from 20% tax bracket to 30% tax bracket.
2. Long-Term Capital Gain Tax on liquid MF:
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If you invest in liquid funds for more than 3 years, you have to pay the Long-Term Capital Gain Tax on your investment return. And it is taxable at a flat rate of 20% with the benefits of indexation.
Taxation on saving account interest
No tax on Saving Account Interest under Rs 10,000 according to section 80 TTA of the Income Tax Act. But if your interest amount goes higher than Rs 10,000 then it will come under the taxable extent. Keeping the minimum amount in the saving account is always suggested to get the interest on the deposited amount.
Why choose Liquid Funds over Saving Account:
- No minimum balance:Unlike bank deposits, there is no condition regarding the minimum balance in liquid funds.
- Higher Returns at Lower Risk: Liquid funds is a type of mutual fund or debt fund in this investment segment funds are invested in debt bonds, government securities, treasury bills, commercial papers, etc. So at lower risk, liquid funds can provide better returns than saving account interest.
- Diversification of Investment: Liquid funds can diversify your investment, which helps spread risk across multiple issuers. With a savings account, on the other hand, your money is held in only one account. You can choose from a variety of liquid funds to invest the amount.
