Why Investing in Liquid Funds Is A Smarter Alternative to Savings Accounts?

When it comes to managing your short-term savings, many people automatically turn to traditional savings accounts. However, with the financial landscape constantly evolving, it’s worth exploring more efficient options. One such alternative that has gained traction is investing in liquid funds. Let’s delve into why liquid funds can be a smarter choice compared to savings accounts.

What are Liquid Funds?

Liquid funds are a type of mutual fund that invests primarily in short-term money market instruments such as treasury bills, commercial papers, and certificates of deposit with a maturity period of up to 91 days. The primary objective of these funds is to provide investors with high liquidity, minimal risk, and stable returns. These funds are designed to offer investors an attractive choice for those looking to park their surplus funds temporarily.

Key Features of Liquid Funds:

1. High Liquidity:

As the name suggests, liquid funds offer high liquidity. Investors can redeem their investments quickly, often with the funds credited to their account within 24 hours of the redemption request. This makes liquid funds an ideal choice for parking surplus cash or emergency funds.

2. Low Risk:

Liquid funds are considered to be one of the safest types of mutual funds. They invest in high-quality debt instruments with very short maturities, reducing the interest rate risk and credit risk typically associated with longer-term debt investments.

3. No Exit Load:

Most liquid funds do not charge an exit load, making them a cost-effective option for investors. This means that you can invest and withdraw your money without incurring any additional charges.

4. Steady Returns:

While liquid funds do not offer the high returns that equity investments might, they provide steady and predictable returns. Historically, liquid funds have offered better returns than savings accounts and are comparable to fixed deposits, depending on the market conditions.

5. Suitability for Short-Term Goals:

Liquid funds are best suited for short-term financial goals, ranging from a few days to a few months. Whether you’re saving for a vacation, a down payment, or just want to park your emergency fund, liquid funds provide a secure and flexible option.

Why Consider Liquid Funds Over Savings Accounts?

1. Higher Returns:

One of the most compelling reasons to choose liquid funds over a savings account is the potential for higher returns. While savings accounts typically offer interest rates ranging from 2.5% to 4%, liquid funds can provide returns in the range of 4% to 7%, depending on market conditions.

2. Instant Liquidity:

Like savings accounts, liquid mutual funds offer easy access to your money. Most liquid funds provide instant redemption facilities, allowing you to withdraw your money within 24 hours. This makes them a convenient option for emergencies or short-term financial goals.

3. Strategic Temporary Parking:

Liquid funds are ideal for temporarily holding large sums from sudden cash inflows, such as bonuses or property sales, when you’re unsure where to invest. They also allow equity investors to gradually move funds into equity mutual funds through a Systematic Transfer Plan (STP), potentially leading to higher returns compared to keeping the money in a savings account.

4. No Lock-in Period:

Unlike some investment options, liquid funds do not have a lock-in period. You can invest and withdraw your money at any time without worrying about penalties or charges, providing flexibility that savings accounts might not offer.

Illustration:

Let’s assume one has a total sum of Rs 100,000 lying idle in bank account and they have to pay Rs. 60,000 for daughter’s school fee in June, and in July, they have an insurance premium of Rs. 40,000 to pay. Now instead of keeping the funds in account, one may consider investing them for a short time frame. While stock markets or equity funds may be too risky for these important payments, and bank fixed deposits would lock in money with low returns, liquid funds offer a better alternative.

Liquid funds are designed to allow redemption of units within 24 hours, providing quick access to your funds. By investing in a liquid fund, there are chances that you can earn a little more than what you would have earned in a bank fixed deposit.

In conclusion, liquid funds are ideal for investing your spare cash for a shorter time frame and earning better returns compared to a savings account. Therefore, liquid funds can serve as an ideal alternative to short-term fixed deposits.

Key Takeaways from Net Brokers:

Investing in liquid funds is a smarter alternative to traditional savings accounts, offering higher returns and easy access to your money. Whether you’re looking to park your emergency fund or save for a short-term goal, liquid funds provide a low-risk, flexible option that could help your money work harder for you.

If you’re ready to explore this smart investment opportunity, connect with us today to get started. With expert guidance, you can make informed decisions that align with your financial goals and risk tolerance.

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