Savings Account

Liquid funds vs Savings Account: A guide to smart financial choices

3 min read

Jan 19, 2024

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Many of us may have extra cash in hand without knowing how to use it. The first thing you do is put them in your Savings Account. While this is the traditional way to go about it, you must know that a recent trend to invest in liquid funds is catching on. Understanding where to park your hard-earned money is crucial in today's financial landscape.

Understanding Liquid Funds

Liquid funds are debt mutual funds that invest in debt securities with a maturity of 91 days. They invest in short-term money market instruments, such as treasury bills, certificates of deposits, and commercial papers, offering the potential to earn market-linked returns. Their financial liquidity is their hallmark, enabling investors to quickly withdraw their money, typically within one working day. These funds are ideal for those looking to park their money for short periods, offering better returns than traditional savings accounts.

Understanding Savings Accounts

Savings Account is a familiar form of banking product. It provides a safe place to store your funds while earning interest. Savings Accounts are excellent for financial planning, offering easy access to your money and making them a reliable emergency fund. They are a cornerstone of liquidity management, ensuring your cash is readily available when needed.

Difference between Savings Accounts and Liquid funds

When comparing Savings Accounts and Liquid Funds, it's essential to understand their distinct features and benefits. Let's find out the key differences that set these popular financial instruments apart.

Feature	Savings Account	Liquid Funds
Primary purpose	Safekeeping of funds with steady interest accumulation	Short-term investment with potential for higher returns compared to Savings Account interest rate
Risk factor	Low risk, with guaranteed returns	Low to moderate risk, with no guarantee of returns
Returns	Generally lower, fixed returns	Potential to earn market-linked returns
Liquidity	High liquidity, with immediate access to funds	High liquidity, with access to funds typically within one working day.
Capital safety	High, with principal amount typically guaranteed	Relatively safe, but no guarantee of principal
Regulatory body	Regulated by RBI	Regulated by SEBI
Interest rate fluctuation	Not subject to market fluctuations	Subject to market fluctuations
Tax implications	Interest income is taxable at the individual’s slab rate. However, interest earned up to Rs 10,000 is exempted from tax under Section 80TTA.	Subject to short-term capital gains tax

Also Read: What is a Savings Account and how does it work?

Similarities of Savings Accounts and Liquid funds

Despite their differences, both Liquid Funds and Savings Accounts are essential in crafting a balanced asset allocation strategy. They serve as liquid assets, integral for principal protection and acting as an inflation hedge.

Asset allocation: In the realm of personal finance, diversifying your investments is key. Liquid funds and Savings Accounts complement each other within an asset allocation strategy, balancing liquidity and growth potential.
Ease of access: Both Savings Accounts and liquid funds offer easy access to funds. This is crucial for investors who require quick liquidity for short-term needs or unforeseen expenses.
Regulatory oversight: Both financial instruments are regulated, with Savings Accounts being overseen by banking regulators (RBI) and liquid funds by market regulators (SEBI). This ensures a level of security and standardization in practices.

Also Read: Should you invest in Liquid Funds or Fixed Deposits?

Conclusion

Both Savings Accounts and liquid funds are crucial financial tools, each serving distinct yet complementary roles in personal finance management. Understanding their similarities and differences is key to making informed decisions that align with your financial goals and risk appetite.

Axis Bank offers both these options, catering to a diverse range of financial needs. Savings Accounts offered by Axis Bank are known for their reliability, attractive interest rates, and ease of access, making them a solid choice for secure, everyday savings. If you are looking to invest in Liquid Funds, you can seamlessly do so through Axis Bank's Net Banking or mobile application.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.