For nearly all of us, the first place we consider putting our money is the bank savings account. Having been around for decades, savings bank accounts have become synonymous with safety, security and more importantly, easy liquidity – offering the convenience of immediate withdrawals while at the same time earning some interest income as well. With the progress of the financial system in India, however, smart investors have begun channelizing idle savings and surplus income into alternative avenues like liquid mutual funds that tend to offer better returns.
What are liquid mutual funds?
Liquid mutual funds invest in short term debt securities like T-Bills, commercial papers, government securities and money market deposits.
As such, they inherently provide safety and liquidity with moderate returns for investors. Dividend is earned from these instruments which more often than not gets reinvested, offering an additional source of passive income.
Let us evaluate why liquid funds may be a better alternative to bank savings deposits. Below are the top 3 reasons to buy liquid funds versus bank savings account:
Interest rates and returns:
Liquid funds generally offer higher returns, between 7% to 8%, as compared to bank savings account interest rates which largely only offer a 4% interest rate(few exceptions exist where interest rates are 6%).
While the returns vary on a daily basis depending on the market movements of the underlying securities, they are still higher.
This is one of the most important reasons why investors with surplus funds choose to diligently invest in liquid funds rather than keep them in bank savings deposits.
One of the main reasons why liquid funds are able to offer higher returns is because of dividend earnings on the debt funds. Even after dividend distribution tax, post-tax returns are higher than the average 4% returns from savings accounts. This dividend, when reinvested, offers an additional passive source of income for the investor.
Ease of operation:
Liquid funds do not require any need to open a bank account, the transfer can be done directly, online; unlike bank savings accounts. Surplus money can easily be invested in liquid funds and withdrawn without hassle, offering ease of operation for investors.
Thus, by its nature bank savings accounts are just that – an avenue for savings, not for investment. As such, they are considered more suitable for meeting regular expenses and other financial exigencies.
For the smart and savvy investor, surplus income, which also requires easy liquidity, may be invested in liquid mutual funds to help generate passive income and build wealth.