Have you been working for a year or two now? Or perhaps a little more? Whichever it is, you are (hopefully) adding to a small but growing pile of cash in your savings account.
It's what you do, right?
But you have friends who have been in the work world longer. They advise you to start investing in liquid mutual funds.
It sets you thinking.
Should you leave the safety of a savings account and invest in mutual funds, which "are subject to market risk?"
The benefits of both lie in the purpose you have assigned for your money.
The Key Difference
A savings account does not and cannot double up as an investment account. Liquid funds actively invest your money in low-risk assets to generate returns while a savings account stores your money for steady but low returns.
Liquid funds: a snapshot
What are liquid funds?
They are mutual funds invested in instruments like treasury bill with short maturity periods.
What are they ideal for?
The maturity period for liquid mutual fund ranges between 10 days to three months. It makes them perfect for achieving short-term goals like emergency funds or buying appliances and gadgets.
What are the benefits?
Higher returns of up to 7-9%*
Liquid mutual funds have extremely attractive return rates compared to savings accounts and fixed deposits (FDs), which average 4-5%.
Easy redemption with no lock-in period
Having to wait out lock-in periods is a bugbear of savings accounts and FDs. Liquid mutual funds allow you to access your money any time you need it.
Very low-risk of investment
Liquid mutual funds are very low on risk as they are not exposed to much volatility
You get your dividends tax-free
No minimum balance needed
Unlike a savings account, liquid funds are flexible and do not require a minimum balance.
Savings accounts, on the other hand...
A savings account is typically the starting point for those beginning their financial journey. It's great to link to your bill payments and a safe way to deposit the remaining money. The biggest advantage of a savings account is the familiarity that comes from having grown up with it.
But savings accounts don't offer the flexibility of liquid funds. They
Have low interest rates
Levy charges if you fail to maintain a minimum balance
Have withdrawal restrictions
Are not inflation-resistant
The natural winner
Liquid mutual funds are perfect to help you get started on goal-based financial planning. Here, we are big fans of organising investments and budgets based on goals. We believe it's a more focused, and committed approach. Liquid funds help you start small and are perfect to achieve short-term goals like buying new appliances, setting up an emergency fund, travel fund, etc.
Savings accounts are good to start with when you are setting out on your financial journey. But liquid fund investments help you reach your chosen destinations.
About the author:
Vikas Kothari is the founder of P10 Bank, a digital banking startup designed for young working professionals.
Disclaimer: The article is purely informational and is not a solicitation to buy, sell in securities or mutual funds. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article. Mutual Funds are subject to market risk and the returns mentioned are indicative and should not be taken as accurate.