Why Liquid Funds Are a Smart Option Over Bank Savings (Especially in Today’s Times)

Introduction

Many of us park surplus money in a bank savings account, thinking it’s the safest option. While safety is important, the reality is that the often-low interest rates on savings accounts can erode purchasing power over time. Enter liquid funds — a middle ground that offers both liquidity and better returns.

In this post, we’ll explore what liquid funds are, how they work, their advantages & limitations, and when they may be suitable for you.

What Are Liquid Funds?

• Liquid funds are a type of debt mutual fund that invests in high-quality short-term instruments (such as treasury bills, certificates of deposit, commercial paper) with maturities typically up to 91 days.
• Because their underlying assets are short-duration, they carry low interest rate risk and are relatively stable.
• One of the key features is easy liquidity — you can redeem your investment quickly (often in a day or two).

Why Consider Liquid Funds Instead of Just a Savings Account?

How Liquid Funds Work: Behind the Scenes

• Asset Choices: The fund manager picks high-grade short-term instruments (government securities, corporate paper with good credit ratings, etc.).
• Maturity Management: The average maturity is kept low (e.g., under 90 days), so the fund is less sensitive to interest rate changes.
• Dividend / Growth Option: Investors may choose a growth (capital appreciation) route or regular dividend (though dividends are not guaranteed).
• Redemptions: When you redeem, the fund liquidates some of its holdings; because these are short-duration securities, the process is smoother.

Strengths & Limitations: What You Should Know

Strengths:

• Better potential returns than a savings account (after adjusting for risks and taxes)
• High liquidity
• Lower volatility compared to longer-term debt funds
• Good for short- to medium-term parking of funds

Limitations / Risks:

• Returns are not guaranteed
• Slight interest rate risk (though minimal)

When Should You Use Liquid Funds?

• To park your emergency fund (money you may need at short notice)
• To hold surplus cash while you decide on longer-term investment avenues
• As a buffer in Systematic Transfer Plans (STP) — you can move money from liquid funds to equity when market conditions look favourable
• When you want better returns than a savings account without wanting to take high risk

Tips Before You Invest in Liquid Funds

• Check expense ratio and exit loads — these can affect net returns
• Choose funds with consistent track records
• Understand tax implications (short-term vs. long-term gains)
• Don’t treat them like fixed deposits — redeem only when needed or when you have a plan for redeployment

Conclusion

Liquid funds are a great way to earn more on your idle money. While a regular savings account gives around 3–4% returns per year, most liquid funds have delivered 5.5–7% annually in recent years — and still allow you to withdraw money within 24 hours.