Both liquid funds and bank savings account are good for parking short-term funds. Compare terms of safety, liquidity and returns before taking a final decision.
For parking your short-term funds, which are meant for emergencies or may be required at a short notice, you can utilise your bank savings account or liquid schemes of mutual funds. Earlier, these two were more or less at an even keel. Nowadays, due to certain reasons, the appeal of liquid funds is less than earlier.
Returns are on the lower side due to the easy interest rate policy followed by Reserve Bank of India, somewhere around 3% annualised. There is an exit load up to seven days, which means if you exit within seven days of investment, there would be a penalty. Dividends from mutual funds (MF) schemes are taxable in the hands of investors from April 1, 2020. Interest from banks is taxable at your slab rate as well. Hence MF dividends and bank interest are taxable at the same rate, which is your slab rate.
While bank interest rates have dropped as well due to RBI’s easy interest rate policy, there are a few banks offering relatively better interest rates in their savings account. There is no exit penalty in a savings account.
Comparison
Safety should be the first concern in any investment. Generally, both liquid funds and banks are safe. Still, do some minimum due diligence. For MFs, look at the pedigree of the AMC / the goodwill of the sponsor group and the quality of the portfolio which is available on the website of the MF. Though it may seem that “a bank is a bank”, pedigree is relevant. Investors should prefer public sector banks or leading private sector banks.
Both are liquid. The seven-day exit load in liquid funds is an exit load, not an absolute lock-in. Nowadays investment execution is moving online. Banks are offering mobile phone based apps, but quality or smoothness of app-based transactions may vary from bank to bank. MF transactions, i.e., purchase and redemption can be done online.
On returns, the comparison is between liquid funds’ past returns and banks’ future contractual returns. Mutual funds cannot indicate future returns, hence past returns are taken as a proxy. Taking a ballpark of 3% annualised for liquid funds, you can compare it with the rate offered by various banks.
For execution, in liquid funds you may either do it yourself if you are internet savvy or go through a MF distributor. There are no separate charges payable to the distributor, it is built-in in the running expenses charged to the fund. The returns from liquid funds mentioned above are net of running expenses. For banks, you may check the smoothness of the app-based execution.
The other option you may consider is bank term deposits. For your emergency fund, though there is no defined time horizon, sometimes the funds lie for a long time. Bank term deposits are liquid, i.e., can be prematurely withdrawn, but there may be a pre-mature withdrawal penalty. If the term deposit rates are attractive or better than liquid fund returns, you may consider that as well, keeping in mind the rate of penalty.
Conclusion
The investor should not be blown away by the rate offered by the bank, keeping in mind the incidents that have happened with certain banks. There is an insurance under the Deposit Insurance Credit Guarantee Corporation Act (DICGC), which is now Rs 5 lakh per bank against Rs 1 lakh earlier. However, the DICGC cover should not be the logic for your investments; go with a bank that does not require the DICGC cover.
SAFE & LIQUID
Generally, both liquid funds and banks are safe. Still, do some minimum due diligence.
The seven-day exit load in liquid funds is an exit load, not an absolute lock-in.
Taking a ballpark of 3% annualised for liquid funds, you can compare it with the rate offered by various banks.
If the term deposit rates are attractive or better than liquid fund returns, you may consider that as well, keeping in mind the rate of penalty.
Source: https://www.financialexpress.com/money/smart-investing-options-to-park-your-short-term-surplus/2253665/