Every parent teaches their child the importance of saving money. The moment you get a job, everyone from your aunts and uncles to your neighbour advises you to spend less and save more. And it is true. Saving is important. There is a sense of satisfaction when you see your savings account grow month after month.
However, that may not be the best way to deploy your money. Investing in liquid funds is a far better option compared to putting your money in a savings account. Here’s why.
What are liquid funds?
Liquid funds are nothing but a type of debt mutual funds. They invest in various money market instruments such as treasury bills, commercial papers, government securities and term deposits. These funds have a maturity of less than 91 days.
Why are they better than savings account?
- Annual returns
Bank savings accounts are considered to be very safe. However, when it comes to returns, they are not very efficient. Liquid funds generate returns that are equal to 8-8.5% per annum. In comparison, savings accounts offer returns of 4-6%. This is much lower compared to liquid funds.
- Risk quotient
One of the biggest reasons why people put their money in savings accounts is because they are very safe. There is virtually no risk of losing your capital. In comparison, the risk quotient of liquid funds varies between low to moderate. In other words, the risk is higher compared to saving accounts.
However, by putting your money in savings accounts, you face another kind of risk known as opportunity risk. That means, you are losing out on the opportunity of earning better returns by putting your money in an avenue that offers very low returns.
- Lock in period
Saving accounts such as fixed deposits do have a specified lock in period. If you liquidate your FD prematurely, the lender may charge you a penalty.
Liquid funds have no lock in periods. You can withdraw your investment any time you wish. For example, if there is any emergency and you require the funds, you can withdraw your capital from liquid funds immediately. As a result, liquid funds are more flexible for you to invest your capital.
Both saving accounts and liquid funds serve their purpose and as an investor, you need to know how much money you should invest in each avenue. Experts suggest that it is ideal to keep one month’s expenses in a savings bank account while you should keep at least 3-6 months of expenses in a liquid fund.
Overall, a liquid fund is a better investment idea compared to a savings account because of the higher returns and the flexibility it offers.