A Liquid Fund Is Suitable For IDLE Cash In Saving Bank Account

we keep a larger-than-required cash balance in our savings account

What Happen When you Deposit money in a savings account

All of us have a savings bank account and our salaries or professional income is deposited there every month. And many of us may not be even aware that the interest of 3.5 per cent per annum that we get on our savings account balance is only on the minimum balance between the 10th and the last day of that month.

if you deposit Rs 100,000 on the 11th of a month and if your balance has been Rs 1,000 before the deposit, you will get interest on the minimum balance of Rs 1,000 at the rate of 3.5 per cent. Suppose you start the month of July with a zero balance and, say, you deposit a sum of Rs 1,000 on July 11 and withdraw it on August 31 (after 51 days), you get zero per cent interest on that amount for 51 days; in both the months — July and August — from the 10th to the 31st, the minimum balance was zero.

Who gains out of this? It’s your bank, free money for them to lend at higher rates and, in some cases, right back to you, as your housing or car loan at 11 per cent. It is also pertinent to add here that interest on the savings account is computed on a simple interest basis, and is finally credited into the bank account at the end of each calendar quarter. So there is no compounding effect. And, more so, the interest income so received from your savings account balance is taxable at the applicable rates. So the returns earned on your savings account balance, net of tax, is very low, around 2 per cent. Shocked? Now, what if we tell you that at the current level of annual inflation of 12 per cent, your real post-tax return from the savings account balance is -10 per cent; (yes, negative 10 per cent).
Bias for savings account

Why, then, do we still prefer keeping our surplus cash in savings accounts? May be due to:

Lethargy to look for an alternative investment avenue;

Lack of awareness about superior investment options;

Safety of capital in savings account;

Liquidity for anytime withdrawal.
Don’t let cash idle


A bank fixed deposit is an immediate option we think However, a fixed deposit would be attractive only in the medium-to-long term due to the penalty on pre-mature withdrawals which can reduce your returns sharply. So your money is effectively locked in up to maturity of the deposit.

Moreover, the interest on bank deposits is taxable too. Savings and current accounts, as we now know, though liquid, do not offer attractive returns.

Investing in shares, bonds, and so on, for short periods can be quite risky and can even result in a loss on the original investment. So, if you have an alternative to invest your surplus cash, which retains all the features of a savings account (easy liquidity, relative safety of principal) and yet offers you a higher post-tax return, would you want to know more about it?

A liquid fund is the ideal option. Liquid funds are one type of open-end debt schemes offered by mutual funds in India which are, in turn, regulated by SEBI. They seek to offer optimal returns with moderate levels of risk and high liquidity. Liquid funds do not invest in equity shares. They invest only in fixed income instruments such as commercial paper, short-term corporate debt, Government of India Treasury bills etc. Though liquid funds do not guarantee the capital, the chances of capital loss are minimal as it generates income primarily on interest accrual. They are an ideal solution for parking surplus funds for short periods of time, at better post-tax yields than bank savings and fixed deposits.