Liquid Funds: A Proxy to Savings Accounts?

Liquid funds are making waves in the market, but are they really a better alternative? There’s only one way to find out, i.e., read till the end.

When it comes to handling our finances, we’ve often relied on the good ol’ savings account. It’s been like a dependable friend, offering easy access and a sense of safety for our hard-earned cash. But now, there’s a new contender in town.

They’re causing quite a stir and raising an intriguing question: Can these liquid funds actually step in as a substitute for our beloved savings account?

Delving into Liquid Funds

First things first, what exactly are these liquid funds? Think of them as mutual funds with the least amount of risk. These funds focus on short-term investments in government securities, Treasury bills, and call money.

Unlike their counterparts, they lean towards caution with a shorter average maturity period, typically investing in securities maturing within a concise 91-day span. And the average return?
A respectable 4%–7%. 

Unraveling the Differences

Let’s conduct a side-by-side comparison.
Both savings accounts and liquid funds pride themselves on liquidity. Need cash from your savings?
Easy-peasy, no penalties involved. Similarly, liquid funds, being mutual funds, allow relatively swift access to funds within a window of 1 to 2 business days, based on the fund’s terms, and then some funds even allow you to withdraw within 30 minutes, offering high liquidity to the investors.

Here’s where the plot thickens: While savings accounts are known for their low-risk nature, their interest rates might struggle to keep pace with inflation, and you might just end up draining your buying power and reducing your capacity to buy more. Also, you can save a lot more than usual on your taxes by investing in mutual funds.

Conversely, liquid funds, although not guaranteed, could offer a touch more safety while potentially delivering higher returns. 

Decade-ish comparison  

In the last ten years, comparing liquid funds to savings accounts has been like uncovering hidden treasures. Savings accounts, reliable but not particularly lucrative, sit at an average interest rate of around 3-3.5%. On the flip side, liquid funds sparkle with promise, flaunting reported returns ranging from 4–7%.

What’s more, liquid funds have a sparkling record—they’ve never dipped into negative returns even going above 8%, setting a record. 

Yet, these funds come with a caveat. They may dance with faint or barely noticeable fluctuations and lack the safety net that savings accounts offer. The choice between them swings on what an investor prizes more: security or the potential for higher returns.

Those valuing safety might lean towards the stability of savings accounts, while the adventurous souls chasing better returns might be enticed by liquid funds, aligning with their risk tolerance and financial aspirations. 

Deciphering the Best Fit

Picture this: safety and accessibility reign supreme in the realm of savings accounts, making them the stalwart choice for the risk-averse. Yet should a substantial sum lounge idly in your coffers for a brief spell, liquid funds, with their flirtation with risk and promise of handsome returns, might just lure you into their world.

It’s the classic tussle between the secure haven and the tantalizing adventure—where does your classic treasure seek its fate? 

Wrapping Up the Money Talk

In essence, liquid funds emerge as a viable alternative to the traditional savings account. They offer akin liquidity perks while potentially delivering superior returns. These funds flirt a bit with interest rate risks, yet they’ve never stumbled into negative returns and have even soared past the 8% mark.

Alas, the ultimate choice revolves around your distinct financial ambitions and your appetite for risk. It’s essential to ponder over your objectives and the urgency of accessing your funds before making a verdict. 

Hence, are liquid funds the guiding star in your financial universe? That’s a decision tailor-made for you, aligning with your unique financial terrain and ambitions. 

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