Liquid funds versus Savings accounts



  • One of the important questions i typically get when I advise our customers on financial planning is should I move my money from savings account to Liquid funds, this blog post attempts to answer this question, before we answer this question lets try to understand why do people keep money in savings account , for me there are 3 reasons

    • To ensure liquidity , so that money can be used whenever required.
    • Get some returns as money in the bank is more secure and gives some basic returns in the pocket
    • Financial laziness where you don't worry about what your money does in your account ūüôā
      So let's look at how much interest rates you earn on savings accounts with different banks , below is the current saving bank interest rates offered by different banks

    Saving Bank Interest Rates (Nov 2017)
    Bank Name  Interest Rates offered 
    Yes Bank 6 % PA
    ICICI Bank 4% PA
    Kotak Mahindra bank 6% PA
    SBI 4% PA
    HDFC bank 4% PA
    Axis bank 4% PA
    If you look at most of the top saving banks give interest rate in the range of 4-6 %

    Now let's look at yearly return on top liquid Funds in last one year to get an idea on how they fare as compared to your favorite savings account, below table summarizes the data, please note I have only taken top 5 funds as per Crisil ratings.

    Top Liquid funds returns (As of Nov 2017)
    Fund Name  Annual Return 
    Indiabulls Liquid Fund 8.20%
    L&T Liquid Fund 8%
    Tata liquid Fund 8%
    Axis Liquid Fund 8%
    HDFC liqud fund 8%

    So simply based on return liquid funds outperform savings account by anything between, 2-4 % points which is 50-100 % higher return than the savings account , so purely on the basis of returns investing in liquid funds is a no brainer.

    Now lets look at other big concern liquidity, one of the reason keep money in savings account is on the go liquidity you can withdraw money at any time, through an ATM or from the bank, Liquid funds also provide similar kind of liquidity.Liquid funds can be redeemed at any time with no exit load and the funds hit your account in 24 hours. Some AMC's like Reliance also provide ATM cards powered by HDFC bank, where you can redeem the money.

    So all in all Liquid funds  have high liquidity and can compete with savings account on that front.

    Risk Assesment :- Liquid funds invest in  short-term securities mostly with maturity of 91 days , normally interest rates do not change too much in short term, hence interest rate risk is taken care of , so liquid funds do not carry much risk

    So here is my recommendation, don't keep more than 1 month of your planned expenses in savings account move rest of the money to liquid funds and develop your emergency funds for 5-6 months using liquid funds

    If you want to know more about liquid  funds read my post on   All you need to know about liquid funds



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