SB Account, Bank FDs Or Liquid Funds: What Should An Investor Choose?

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Nearly average or muted returns on banks saving accounts and fixed deposits have pushed investors to scout out for other better investment options which are as good as FDs and S/B accounts. So, of all the three, banks saving account, fixed deposits and liquid mutual funds, which can be your safest as well as high yielding bet with high liquidity features. Here is a take on this.

Yield benefits

 
Liquid funds that carry a very low risk with investment in highly liquid money market financial instruments have a maturity period not over 91 days. So, the potential volatility in these products is very low. On an average basis, liquid funds carry a 20-30 days maturity profile.

 Also, in the last calendar year, such funds have reported to yield a substantially higher average return of approximately 7.6%.

Nonetheless, savings account and bank fixed deposits that have constantly lowered down their interest rate offering, barring a few, on an average offer 4% and comparably less after tax return than liquid funds. Certain savings bank accounts like Airtel Payment Bank, can offer you an interest rate of 7.25%.

Liquidity factor or Instant redemption

To make such funds an enticing option among individuals with high surplus cash, the market watchdog, SEBI has cleared the way for instant redemption of such funds with proceeds against the same being credited to the account holder's account on an instantaneous basis. This decision was taken by SEBI only in late April.

The earlier t+1 redemption in liquid funds shall now be replaced by almost 30 minutes or so redemption time. Also, note the instant redemption feature comes with a cap of 90% of the folio value or Rs. 50,000, whichever is less.

With this benefit at hand for retail investors (HNIs and corporates are not eligible for instant redemption of funds), liquid funds have become as good as bank FDs or saving bank account with high liquidity.

 

Taxation

For large sums parked in a savings account, any earning over and above Rs. 10,000 as interest in a financial year is taxable in the hands of the account holder. So, for large sums, savings account is a highly tax inefficient instrument.

Liquid funds are debt funds with tax implication on short term capital gains for units held in for a period of less than 3 years as per the income tax slab rates. So, a return of 7.5% on such funds shall yield an after tax return which is higher in contrast to bank fixed deposits. Dividend on liquid funds attract tax @28.84%

 

Return on Liquid Funds Basis NAV factor

Sebi has also tried to do away with the loophole in terms of return basis the NAV. As now the redemption facility shall be provided basis the day's NAV on which the redemption request was placed or the next business day's NAV whichever is lower. So, Bank FDs, Liquid Funds and Savings Bank accounts are all very liquid.

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