Saving Account Interest vs Liquid Fund Income

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When talked about liquidity investors face two options to invest their amount i.e. Liquid fund category of Mutual fund or Conventional Savings bank account. Each option has its own pros and cons which further varies as per the needs and condition of every investor. Some may prefer Liquid Fund owing to its higher rate of return and other may prefer savings account for risk free return. Therefore, proper consideration needs to be taken before choosing the option which will best suit you.

Every individual maintain a contingency fund to cover unexpected expenses and expect that funds to be easily accessible as and when required. Before deciding on the option, consideration to be given in the following areas:

  1. Saving Account vs Liquid Fund - Rate of Return

      Let’s look at the below list to see what rate of return different banks offer on the savings account.

      Bank vise Interest on Saving Account
      Bank Name Interest on Saving Account
      HDFC Bank 4% p.a.
      Axis Bank 4% p.a.
      SBI Bank Upto 1 Crore- 3.50% p.a.
      1crore & above- 4% p.a.
      ICICI Bank 4% p.a.
      Induslnd Bank Upto 1 lakh- 4% p.a.
      1lakh-10lakh- 5% p.a.
      10lakh & above- 5% p.a.

      As you can see, most of the banks offer 4% p.a. rate of return with some banks offering a higher rate but that is usually for balances that are in excess of Rs 1 lakh or such higher amount. But in case of Liquid Fund, investors will get the same rate of return no matter the investment amount and hence here the size of the investment is not something that is the determining factor.

      Further, Rate of return on Liquid Fund offered by various Mutual Fund Houses can be illustrated as follows:

      Liquid Fund Scheme last one year performance
      Scheme Name Last 1 Year Performance
      L&T Liquid Fund7.1%
      ICICI Pru Liquid Fund7.0%
      Edelweiss Liquid Fund7.1%
      Indiabulls Liquid Fund7.1%
      LIC Liquid Fund7.1%

      One can notice that on an average, returns generated by Liquid fund are approx 7%, which is higher than the return offered by banks on savings account. However, it should be kept in mind that liquid funds are not completely risk free. They can be considered as low risk-low returns instrument as they invest primarily in debt instruments but there is no assurance of return. On the other side, savings account are generally considered as risk-free return meaning there is assurance that fixed amount of interest will be credited to your account periodically, free from any market fluctuations.

  2. Saving Account vs Liquid Fund - Accessibility

      With the widespread use of technology, everything is just a click away. Investor can easily pay the amount online via savings account, without the need to go to bank and withdraw cash to make the payment. In term of liquid funds, the amount comes back to the investor quickly but one has to understand that this will be slower than what one would experience in a savings bank account because the money first comes to the bank account and then the investor can use it as required. This is however a cost that one would have to consider for the higher rate of return that is being generated in the liquid fund and hence one has to take the decision accordingly.

      In nutshell, saving account funds are ready available and can be withdraw any time via cheque, net banking, online payment or ATM withdrawal.

      Where Liquide fund amount is locked with Mutual fund house, you need to request for fund withdrawal well in advance and this process will take approx 24 hrs to get fund in your bank account. Market and bank holidays are also need to be considered when you are sending a fund withdraw request. So when you are putting money in liquid fund, you need to plan well in advance about your withdrawal plan so you will have liquid money available when u need.

      How to take exit from liquid fund?

      Getting exit from your liquid fund is very easy, you need to submit withdrawal request before 2 PM (You need to check with your MF AMC for request closing time) to your fund house, and money will be deposited in your bank account on next working day before 9:00 AM. Request can be raised via online, offline or call and trade mode.

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  4. Saving Account vs Liquid Fund - Tax Treatment

      Savings Account

      You may be aware that interest on saving account upto Rs 10,000 are not taxed, meaning if you earn Rs 12,000 as interest, you need to pay tax on only Rs 2,000 (Rs 12,000-10,000).

      Liquid Fund

      Short term capital gains of Liquid funds are simply added to your income and get taxed as per your income tax slab. On the same hand, Long term capital gains (if holding period is more than 3 years) will be taxed at the rate of 20% after indexation and 10% without the benefit of indexation.

      See the illustration below to see how the above tax rates effect differently to different individual as per their tax slab.

    1. Let us assume the rate of return on savings account is 4% and on liquid fund is 5% and the tax slab is 10%.
      . Amount of investment (Rs) Interest (Rs)
      Tax @10%(Rs)
      Net Benefit(Rs)
      Savings Account3,00,00012,00020011,800
      Liquid Fund3,00,00015,0001,50013,500

      In this case, you can see that Liquid Fund is more profitable net of tax.

    2. Let’s consider one more example when the rate of return on savings account is 4%, on liquid fund is 5% and the tax slab is 30%.
      . Amount of investment (Rs)Interest (Rs)
      Tax @10%(Rs)
      Net Benefit(Rs)
      Savings Account2,50,00010,000010,000
      Liquid Fund2,50,00012,5003,7508,750

      In this case, you can see that saving account is more profitable net of tax.

Saving Account vs Liquid Fund - Finla Thought

    Therefore, we can say no one option is best for anyone, as the benefit varies as the investment amount changes, tax slab changes or rate of return fluctuates.

    Based on the discussion, we can infer that proper consideration needs to be taken on the factors and decide accordingly to invest. However, in most cases, Liquid Fund will definitely be a better alternative to Savings Account as the rate of return offered is more.

    Saving bank account funds are ready available where liquid fund are your extra liquid money which you need to withdraw for planned expense/investment. Reliance Mutual fund is giving any time money card which is linked with your liquid fund and can be used to withdraw limited amount of fund like your saving bank account. In this case your liquid fund investment is like your saving bank account with higher interest earning.

In this article we covered general question about - Liquid fund vs Saving account income which one is better and why? When to keep money in saving account and when to move to liquid funds? How to exit from Liquid fund? Best option between Liquide fund vs Saving account.

Last updated on 15th Aug 2018



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