Should You Park Your Money in Liquid Funds or Savings Account?
In order to ensure that there is an adequate emergency fund, individuals tend to park all their savings in one place. This contingency fund may help in case of short-term loss of income and cover unforeseen expenses as well.
A contingency fund is like an umbrella on a rainy day. It helps individuals through difficult times and can be withdrawn in no time. Liquid schemes are an obvious choice to build the fund. The schemes offer higher returns compared to bank accounts.
Where should you park your funds?
- Savings account
A savings account, as the name suggests, is suitable for the purpose of your daily requirements. It is not meant for investment or wealth maximization. Most individuals tend to have savings account for their day-to-day financial needs. Usually, the balance in such an account is slightly higher than the monthly salary of an individual. The account fulfills the basic purpose of meeting the monthly expenses of the account holder.
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- Liquid fund
A liquid fund is an investment account where the investments are in the form of short-term papers. It has a short tenure, a lower risk, and a significantly higher rate of return. Additionally, it brings financial discipline and ensures that individuals are consciously looking at their long-term goals and working to achieve the same.
Before you invest your funds in one of the above options, you must consider two aspects:
- Tax benefits
There is an exemption of the interest income earned on a savings account up to an amount of INR 10,000. On the other hand, a number of individuals choose liquid fund to avail of income tax benefits associated with it. For liquid funds, there is a benefit in tax, only if the holding period is more than three years. In case the holding period is less than three years, the post-tax return can fall to 4.15 percent for taxpayers falling in the highest income bracket.
Since it is a contingency fund and will be used for unforeseen events, your money should be parked in those instruments that can be immediately accessed. The post-tax returns gap between the savings bank and liquid fund is very low. From a liquidity point of view, a savings account is the most liquid of all financial instruments. The money, if redeemed, can be received on the next day. Similarly, the liquid fund has no exit load and can be exited overnight.
Usually, the decision is taken based on the income of the investor and the duration for which one is planning to invest. It makes no point to invest in liquid funds for a couple of months. If the investment is for a longer duration, investing in liquid funds will be an ideal choice. In case there is a short-term requirement of funds, it is ideal to park them in a savings account.