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Liquid Funds vs. Savings Account – Overview, Returns, Risk

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A savings bank account is the most preferred option to store one’s savings or surplus funds. Also, such accounts are considered the best option to store one’s emergency fund as they are very safe. However, savings bank accounts are not efficient enough from the investment point of view, as the rate of return is meagre.

Now, you may have this “Is there a better a better way to deal with surplus cash?” in your mind. The answer is yes!

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Now you may ask “Is there a better a better way to deal with surplus cash?”

Of course yes! Invest your short-term funds in ‘Liquid Funds’.

have evolved as an ideal haven for short-term investors. These funds are one of the most convenient ways to earn better returns as compared to a savings bank account.

Let’s have an in-depth look at liquid funds.

1. Liquid Funds: An Overview

Liquid Funds are a type of debt mutual funds. These are open-ended schemes having a short-term investment horizon. Liquid funds primarily invest in money market instruments such as certificates of deposit, treasury bills, and commercial papers maturing within 91 days.

The investment objective of liquid funds is to preserve capital and offer liquidity. To achieve this, the fund manager invests only in the high investment-grade debt instruments.

You can choose to invest for a few days or months, depending on your financial goals. The fund returns will be based on the prevailing market rate. The best part is that there is no exit load applicable to the investors of liquid funds. The schemes are also available in variants like Daily, Weekly or Monthly Dividend and Growth option.

Not only will you be able to earn steady returns over short time intervals, but you can also choose to redeem a part or the entire amount of investment within 24 hours.

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2. Returns of Liquid Funds vs Saving Account

Savings bank accounts are considered the only investment option which generates risk-free returns. Moreover, you are assured of the interest being credited to your account. A major disadvantage is that most banks generally do not revise the interest rates on savings bank accounts frequently.

Although liquid funds are not entirely risk-free, however, they are low risk-low returns instruments. As they invest predominantly in debt instruments, they are subject to interest rate risk and credit risk.
A change in the prevailing interest rates may cause a difference in the price of the debt instruments. This, in turn, may cause the NAV of the liquid fund to fluctuate. Since liquid funds invest mainly in short-term debt securities, you may not find sharp fluctuations in the NAV of liquid funds.

When discussing credit risk, it refers to the likelihood of default in the payment of interest and principal by the issuer of the debt instrument. Liquid funds ensure that your money is invested only in superior creditworthy instruments. In this way, the fund manager reduces credit risk by holding a well-diversified portfolio of securities.

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