Liquid Funds or Savings Bank Account: What’s the Difference?
Regarding managing your money, two standard options are a savings account and a liquid fund. Both are safe places to keep your money, but they work differently. A mutual fund distributor plays a crucial role in helping you understand the differences and make the best choice for your financial goals.
| Factor | Liquid Fund | Savings Account |
| Description | A mutual fund that invests in short-term, fixed-income instruments such as treasury bills and commercial papers. |
A type of bank account used to store money while earning interest. |
| Safety | Minimal risk, as the investments are in secure, short-term instruments like government securities. |
No risk. |
| Returns | Typically provides returns between 3% to 5%, subject to market conditions. |
It offers a fixed interest rate ranging from 2.7% to 4%, with up to 6% for senior citizens. |
| Taxation | Gains are subject to capital gains tax, depending on whether they are short-term or long-term. |
Interest exceeding ₹10,000 is taxed according to your applicable income tax slab. |
| Accessibility/Liquidity | Redeemable within one business day, with some funds offering instant withdrawals. | Funds can be accessed anytime through ATMs. |
| Suitability | Suitable for parking emergency funds or short-term savings before deciding on further investments. |
It is ideal for managing monthly expenses and day-to-day cash storage. |
- Interest Rates: Savings accounts offer a fixed interest rate, usually lower than liquid funds. While liquid funds are not risk-free, they can provide higher returns (3% to 5% per year).
- Taxes: Interest from savings accounts is taxed based on your income, but liquid fund returns are taxed as capital gains, either short-term or long-term, depending on how long you hold them.
- Risk: While savings accounts have almost no risk, liquid funds carry very low risk, primarily investing in safe government bonds and short-term instruments.
- Liquidity: Savings accounts give you quick access to your money, while liquid funds may take a day or two to withdraw, though some funds offer instant withdrawal options.
Liquid funds can be a smart alternative to traditional savings accounts, offering better returns while maintaining similar liquidity. They are ideal for short-term goals or emergency fund planning. While savings accounts are suitable for regular expenses, liquid funds may offer slightly higher returns for idle cash. The right choice depends on your financial goals, how soon you need the money, and your comfort with risk. A mutual fund distributor or advisor can help you effectively incorporate liquid funds into your overall goal-based investing and wealth-building strategy.
