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