Are Liquid Funds Better Alternatives to Savings Accounts?
April 12, 2023
Everyone should have a savings bank account to avoid the dangers of carrying large amounts of cash and to take advantage of the ease of making deposits and withdrawals whenever necessary. In exchange, the bank pays interest on the account balance ranging from 2.70 per cent to 3.50 per cent per annum. The advent of ATMs and debit cards has facilitated the management of savings accounts. While the ATM provides instant liquidity 24 hours a day, seven days a week, cashless payments for expenses can be made using a debit card.
Liquid and Money Market Investment Funds:
A liquid fund is a mutual fund that invests in short-term, high-quality debt instruments such as treasury bills, commercial paper, and certificates of deposit. According to SEBI’s mandate, the maximum maturity for these securities is 91 days. As their name suggests, these funds are highly liquid, with redemption proceeds available within 24 hours. In general, liquid funds yield a greater rate of return than savings accounts. However, returns are not guaranteed because they are market dependent.
The difference between a money market fund and a liquid fund is that the former invests in securities with less than one year of maturity.
Investing and redeeming liquid and money funds is as simple as operating a savings bank account, thanks to online mutual fund investment platforms.
The following are the advantages of liquid and money market funds:
1. Low Default Risk – These funds invest in high-quality, short-term debt instruments like treasury bills and bank CDs. As a result, their default risk is lower.
2. Low-Interest Rate Risk - These funds hold a portfolio of securities with less than one year of maturities. Consequently, they are less sensitive to changes in interest rates and carry a lower interest rate risk.
3. Low Costs – Passively managed liquid funds are typically offered with minimal management fees and expenses, allowing you to invest without incurring high costs.
4. High Liquidity – Most liquid funds offer redemptions without an exit load beginning on the seventh day. Additionally, the redemption proceeds are available the following day or, in some cases, almost instantly. Therefore, these funds are an ideal option for investors who need to have access to money quickly and easily in an emergency.
5. They are regulated by the Securities and Exchange Board of India (SEBI), which provides investors with additional protection.
Liquid and money market funds rank low in popularity:
Retail investors tend to shy away from these funds despite their attractive combination of high safety, low volatility, and higher returns than a traditional savings account. These investors need to be made aware of the existence of such funds or, if they are, to understand how they operate. Furthermore, savings bank accounts come with an ATM card, making it simple to withdraw cash, which is not possible with liquid and money market funds, where redemption proceeds are delayed by 24 hours. To some extent, the benefit of a Rs 10,000 deduction under Section 80TTA makes it more appealing to many than the higher returns funds provide.
There are pros and cons to savings bank accounts and liquid and money market mutual funds. So, they must co-exist in a portfolio. Money that must be used immediately must be kept in a savings account. Money that remains inaccessible for at least a day can be put in these funds for a better return.