Liquid Mutual Fund Vs Savings Account
What do you do when you have excess cash in your hand which you do not require shortly? Should you go for a short-term investment or a short-term deposit in order to park your surplus cash for a brief duration of time is debatable. Myriad people would like to avoid the hassle of going through a number of short-term mutual fund schemes and investing the surplus cash and thus, opt for depositing the money into their savings account. On the other hand, investors who are familiar with the market find investing the surplus in liquid funds for a short-term better option. But are liquid funds really an alternative to the savings account? Does the investor benefit more from investing in liquid mutual funds in the short term than simply depositing the excess amount in the savings account?
In this article, we shall learn more about liquid funds and know if it can make a better alternative to a savings account. Also, we shall disclose certain facts about investing in best mutual funds and draw a neat comparison between the savings account and liquid funds.
What are Liquid Mutual Funds?
Liquid mutual funds are nothing but debt funds which invest the money put in by the investor into debt instruments such as government bonds and treasury bills. These funds have higher appeal in the market for being risk-free and having the least volatility among all other mutual funds in the market and thus, attract surplus cash for the short term from individual investors as well as from other companies. The maturity of the instruments liquid fund invests in goes up to a maximum of 91 days.
Two factors account for the low volatility and the risk-free nature of the liquid funds:
- These mutual funds highly invest in instruments with high credit rating.
- The Net Asset Value (NAV) of the liquid funds is stable and only changes at the accrual of interest income from the investments.
Liquid funds are also convenient as most of the liquid funds do not charge an exit load, which means you do not have to pay charges even if you decide to redeem your investments before maturity of the fund. Although investing in liquid mutual funds may seem quite lucrative an option, they cannot be considered as a bang on a substitute for a savings account. Keep reading to know why.
Things no one tells you about investing in mutual funds
Mutual funds and its subject matters are never complicated, but somehow a lot of people seem to have no more knowledge about mutual funds than what is absolutely required. In fact, in doing so, you may often take things for what they are not and might end up spending more and receiving far less than what you should. Here are certain things about mutual funds which no one tells you:
- There are hidden charges in mutual funds that you pay for when you invest in a scheme. Your fund’s expenses include everything from fund management fees, marketing, and administrative fees to transaction commissions. Your fund manager might just avoid going into the details, but you must keep account of the charges that you are paying. The truth about mutual funds is that they let the fund manager hold a certain portion of your money to carry-out cash redemptions and finance purchases. While you believe that your money is entirely invested to purchase units of various assets, it is not the truth.
- Returns don’t determine the success of your fund, Assets Under Management (AUM) does. It is the reality which is only supposed to concern mutual fund providers and not the investor, but the lack of investor’s knowledge can put him in a false position. The benefit of the investor, in fact, is not the primary objective of the fund manager. While greater returns satisfy investors, fund managers look forward to acquiring more assets under management, which is directly linked to his earnings. The performance of the fund determines its ability to gather more assets and thus, increase the fund manager’s earnings. Often, in doing so, the manager ends up investing in the wrong schemes and exposes investor’s hard earned money to market risks.
- Future projections about funds are an illusion. Investing in mutual funds, you must accept the fact that a number of factors like inflation, the performance of the sector, interest rates in the future, the stability of the equity market, etc. affect the performance of the fund and that the returns in the future may not be anything like past returns. This also traces back to the fact that investments in income schemes are not promoted when interest rates are high. Instead, they are promoted as the interest rates on income instruments go down so that mutual fund providers can market their products. This is done to highlight the near past returns from the fund which shall appear to be normal to the investors while pointing towards higher returns in the past as the returns expected in the future and in doing so, state that the fund has unusual growth potential, making it more alluring to the investors.
Depositing in a savings account is just as simple as it sounds like, but perhaps, you gain more from investing in liquid mutual funds. There are various other factors that distinguish investment in liquid mutual funds from depositing in a savings account. It is necessary for an individual to have an idea about the entire thing before coming to a conclusion.
Difference between Liquid Funds and Savings Account
It is always a wise idea to consider all your options before picking up anyone, and when it comes to money, you have to make sure you employ the best resource. Before concluding whether you should invest in liquid mutual funds or just keep up with depositing in your savings bank account, take a look at how mutual funds and savings bank account differ from one another. Given below are a few points highlighting the same:
- Returns- While interest rates paid on savings account by most banks is no more than 4% per annum in India, the returns from investing in liquid funds are comparatively higher. Liquid funds yield much above 6.0% interest from investors for a short term. The reason for the steady growth of liquid mutual funds is that the interest earned throughout the duration of the fund is divided equally according to the number of days the investor holds the security for. Therefore, the movement of NAV is less uncertain and shows steady On the other hand, with the downside of the bank interest rates, liquid mutual funds appear to be all the more attractive.
- The minimum amount of deposit/investment- Banks require depositors to deposit a minimum maintainable balance which, in general, amounts to Rs. 5,000. But when it comes to liquid mutual funds, there are various low-cost options which aim at including even the smallest of investments. There are various schemes which allow investments starting just at Rs. 100! Liquid mutual funds are hands down, the best option for small investors who do not have a lot of idea about the market but wants to start their investment portfolio at a low cost and are looking for a safe investment option with moderate returns.
- Withdrawal/Redemption- Coming to the ease of withdrawal or redemption on money, we have to admit that a saving account credit balance has added advantages. Money may be withdrawn from an ATM anytime; 24 hours a day or the individual may as well withdraw some money visiting his/her nearest bank branch. However, Liquid mutual funds are no less and offer the same ease of redemption. The redemption process is quite fast, and the investor can expect the funds credited in his bank account by 10 in the morning the next Investment in liquid mutual funds does not come with a lock-in a period like other mutual funds so you can withdraw your investments at your desire.
- Tax benefits- One may claim a tax deduction on interest income from savings bank account up to Rs. 10,000 annually. On the other hand, liquid funds refer to their holding period for calculating the tax. You may avail equal benefits from investing in liquid mutual funds if you consider holding your investments up to 3 years and in case returns after deducting tax is around 5.59%. Withdrawing your investments before the duration of three years will bring down the post-tax returns to 4.15%, which is still a considerable option.
Now that you know the major parameters of differences between investing in liquid mutual funds and depositing your surplus cash in a savings account, it is easier to make a choice. It is also clear from the above points that the returns earned from liquid mutual funds beat the interest income from a savings account. Thus, there is no harm in considering liquid funds an alternative to a savings account. In fact, liquid mutual funds make a better investment option.
Best Liquid Mutual Funds to Invest in India
There are a number of mutual fund providers in the market with schemes which may cater to the investor’s short-term goals. Here are the best liquid mutual funds to consider in 2018:
- ICICI Prudential Liquid Fund Growth, which yields a return of 7.3% for 1 year and 7.8% for a period of 5 years.
- UTI Liquid Fund Cash Plan Regular Plan Growth, which yields a rate of return of 7.4% for 1 year and a whopping 7.9% for the investment period of 5 years.
- Aditya Birla Sun Life Liquid Regular Plan Growth, yielding a return of 7.3% for the duration of 1 year and up to 7.9% for a period of 5 years.
- Reliance Liquid Fund Growth, which pays out returns at 6.4% for a period of 1 year and 6.9% for a period of 5 years.
- Kotak Liquid Fund Growth, the returns from this fund for a period of one year is expected at 7.3%, and for 5 years, the returns are 7.8%.
- Axis Liquid Institutional Growth, which gives out a return of 7.4% in the 1st year and returns go up to 7.9% by the 5th
Evaluation is the key to selecting the right mutual fund which would finance all your short-term financial requirements. Know that liquid funds are not entirely free from market risks and downslide of NAV is possible. But before you zero in on any mutual fund scheme review the fund objectives, calculate the investment you need to make in order to generate the returns that you expect in the short term. Also, know that there is a fee relating to the management of your money known as an expense ratio which is presently set till a higher limit of 2.25%. Do not miss out on checking the fund history which may also give you an insight to the strategies followed by the fund manager and the expected future returns. If you have a little idea about the market and mutual funds, do not worry; just know that mutual fund professionals manage your hard earned money with all their skill and expertise. Before putting your money in any mutual fund scheme, make sure you compare different mutual fund online using a reliable comparison tool. You may also talk to your financial advisor to get near accurate details.
Investing in liquid mutual funds can very well substitute for keeping your money idle in a savings bank account. Liquid mutual funds fulfill your financial needs for the short term and also provide benefits like higher returns, high liquidity, and minimum market risk. Also, the fact that these funds invest in instruments of fixed maturity, the interest accumulation on these funds is steady and is a smart choice considering the steady decline of bank interest rates. Also, the investor is free to choose from among the plethora of schemes, indicating a wide range of available options. Therefore, if you consider investing in liquid mutual funds instead of making a deposit in your savings account, be sure that you have chosen the best option available.