Savings Account vs Liquid Mutual Fund: Where Should You Park Idle Cash?
Here is a comparison of savings accounts and liquid mutual funds to understand which short-term option suits your financial needs best.
Short-term investments are just as important as long-term wealth creation. Since they tend to be more volatile, they require stronger safety nets as the funds may be needed at short notice. Though many people park surplus cash in savings accounts, others seek options that offer better growth potential without compromising liquidity and safety.
Savings accounts offer guaranteed returns and instant access to one's money, which can seem a safer option. But savings accounts typically offer only around 3% returns. On the other hand, there are options that allow you to park your money for a shorter term and offer higher returns. One such option is liquid mutual funds, meant for investors looking for low-risk short-term investment opportunities.
Unlike savings accounts, liquid mutual funds don’t offer a secure return, but they are considered the safest bet among all mutual fund categories. Liquid funds, as the name suggests, offer higher flexibility and liquidity compared to other categories.
Liquid mutual funds invest in short-term debt instruments, typically by lending to companies for around 90 days. They offer higher returns than savings accounts, which makes them suitable for investors with a slightly higher risk appetite.
Industry data shows that some of the top liquid mutual funds have offered over 6% to 7% annual returns over three years, making them more attractive than savings accounts.
Assuming you have Rs 1 lakh to park for one year, here’s how your money could grow:
Savings Account:
Investment amount: Rs 1 lakh
Time: 1 year
Return: 2.5%
Interest earned: Rs 2,500
Final value: Rs 1,02,500
Liquid Mutual Fund:
Investment amount: Rs 1 lakh
Time: 1 year
Return: 6%
Expected returns: Rs 6,000
Final corpus: Rs 1,06,000
Short-term investments in mutual funds can be volatile. Hence, it is advisable to consult a financial expert before making any significant commitments to avoid unexpected losses.
