Liquid Funds Vs Bank Deposits: Know which one to choose and why

By: |
Updated: August 20, 2018 12:50:08 PM

The ideal time to park money in liquid funds is at the time of sudden influx of cash, at the time of huge bonus or sale of a capital asset like real estate or money gained in a windfall.

Financial Express/ Liquid funds One advantage of a liquid fund is that it does not involve entry and exit loads

If you have an enormous amount of money lying idle, then don’t let it sit idle in your saving accounts. Invest in liquid funds. Liquid funds invest in highly liquid money market instruments and debt securities of very short tenure. This short tenure makes liquid funds highly liquid. The instruments are mainly Treasury bills, commercial paper and certificate of deposits with tenure of 91 days. As per past records, they have generated decent returns with the bonus of being liquid assets.

A good liquid fund is cherry picked by your fund manager with qualities like good credit rating and very low possibility of default. Low expense ratio and disciplined approach to investing are some of the additional qualities of an ideal liquid fund. The redemption request of this fund is generally processed within one working (T+1) day.

But, most conservative customers prefer to keep their surplus money in savings bank accounts. The liquidity in bank deposits is more than the liquid funds but, the post-tax return is higher in liquid funds with a safety to principal invested.

ALSO READ: Become Insurance Smart: Duties of a policyholder to be better insured

According to experts, the ideal time to park money in liquid funds is at the time of sudden influx of cash, at the time of huge bonus or sale of a capital asset like real estate or money gained in a windfall. It is ideal to park the money when you are indecisive about the next plan for that surplus money of yours.

Another advantage of the liquid fund is that it does not involve entry and exit loads. Hence, putting money even for a day or two earns some interest. In contrast to this, a bank fixed deposit is for a duration of time, usually 3 months and more. A premature withdrawal results in a penalty which is usually 1 per cent. Hence, a liquid fund offers seamless flexibility where the duration of investing is not known.

ALSO READ: Mutual fund investment: For diversification adopt a contrarian fund strategy

“Banks on any duration of less than a week does not pay anything. Hence, very short-term parking for a few days will always be beneficial in liquid funds. Whenever you are not sure as to when you would want to redeem the funds, then liquid funds should be preferred. For an ultra risk-averse investors, fixed deposits is a better option.’’ says Ashish Kapoor, Founder and CEO, Invest Shoppe India Pvt Ltd.

Both devices offer an interest rate of 7% roughly. However, the return on the fixed deposit is fixed and can vary in liquid funds. The returns in a liquid fund over the last few quarters have been averaging around 1.8 per cent, which gives an annual return of around 7.2 per cent. The last year returns from liquid funds have been 6.6 per cent. The return on fixed deposits with most banks has been 7 per cent. Some banks offer higher interest on fixed deposit to senior citizens.

ALSO READ: Government move to curb Ponzi schemes: What you need to know

Hence, the age of the person investing, duration of investments, the trade of flexibility of investors become a guiding factor in the choice of investing choice between these two investing options.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1With deposit rates broadly stable, further rise in MCLR at a swift pace is less likely
2Your medical insurance plan will now cover mental illness, similar to those offered for treatment of physical illness
3Kerala Floods: How these auto insurance add-ons can protect your vehicles during monsoon, flood