When it comes to parking surplus money investors are left with little choice. They can either park surplus funds in saving accounts or liquid funds. Investors are often left with a question on which investment option is more beneficial. Let’s find out:
A bank savings account is an instrument where depositors can park surplus money and gain interest on it. A savings account maintains high liquidity and money can be withdrawn from it at any point of time as per the requirements of the depositor. A bank savings account is mainly used to keep money handy or to save emergency funds. It offers a high level of capital protection and offers risk-free returns.
Liquid funds are a type of debt mutual funds which are open-ended schemes with a short term maturity. These funds primarily invest the corpus into money market instruments which include treasury bills, commercial papers and certificates of deposit that matures within 91 days.
The main aim of liquid funds is to offer protection of capital and liquidity. Keeping this objective in mind fund managers divert the investible corpus only in low-risk securities. The average returns of liquid funds range from 7% to 9%. So if you want to park surplus cash for a few days while maintaining its liquidity you can try liquid funds. It helps you get money at short intervals while giving you interest rates equivalent to fixed deposits.
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You can easily expect a return of 7% to 9% on liquid funds. The rate of returns is much higher than that of a savings account which ranges from 3% to 4%. Now you can have an additional option to park money other than a savings account or fixed deposits. Not only you can generate higher returns, but you can also benefit from the liquidity it provides.
A liquid fund invests the corpus mainly in high investment-grade debt funds. Therefore these investments are aimed to offer capital protection along with risk-free returns. These are considered minimum risk securities when compared to equities. You may opt for an investment of a few months or few weeks based on your financial goals.
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When compared to savings account liquid funds carry a low-risk factor. Depositors should keep in mind that mutual fund investment, in general, carries market risk. The NAV of liquid funds depends on market fluctuations.
Like any other mutual fund investments, liquid funds also invest in a security that consists of a market price and NAV which fluctuates according to the fluctuations of the market price.
But the NAV fluctuations of liquid funds are not similar to other funds. This is because the interest earned by these securities throughout its tenure is divided equally for the number of days the security is being held. This way the NAV movement of liquid funds becomes more or less linear.
Surplus money parked in a savings account earns a low-interest rate. The interest rate provided by a savings account is minimal and it depends upon the discretion of the bank. However, some banks offer a high-interest rate of 6% on deposits but you have to maintain a minimum balance as specified by the bank.
On the other hand, liquid funds carry no such clause. You do not have to maintain any minimum balance or any minimum investment duration. It also provides higher interest returns making it an attractive option to park money. Liquid funds provide 6.5% o 7% on the invested corpus which is similar to that provided by fixed deposits.
Liquid funds come with an array of benefits. Depositors make use of these risk-free investments to earn a slightly higher interest than a savings account. The funds can be accessed anytime using internet banking options. Some of the benefits of liquid funds are as follows:
No-lock in the period: these funds have no lock-in of deposits which is why these funds are highly liquid.
Easy redemption: it is easy to redeem funds which are invested in liquid funds. The money will be sent to your bank account within 2 days.
Low-interest rate risk: of all kinds of debt funds available, liquid funds contain the least interest rate risk.
No minimum balance required: you do not have to maintain a minimum balance while investing in liquid funds. Also, there is no minimum or maximum investment limit on liquid funds.
Several plans available: you have the flexibility to avail liquid funds with different investment periods like daily, weekly, monthly, and dividend and growth options.
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