Savings bank versus liquid funds


In spite of the rising interest rate regime, funds in a savings bank account yield a return of approximately 3.5% per annum.

This is pre-tax. If you consider the tax liability incurred on this interest income, the returns come down. For instances, if you are in the highest tax bracket a 3.5% pre-tax per annum return means a post-tax return of 2.45% per annum (30% of the return earned is your tax liability , the residual is your post tax return). If you factor in a charge of 10% and an education cess of 2%, your liability reduces the interest income by 1.18% and the post-tax return reduces to 2.32 %. Now, take into account the rate of inflation, which at present is around 4.8 to 5% per annum. You will realize that your funds are earning a post-tax and inflation adjusted return of a negative 2.68% per annum (rate of inflation of 5% less the post-tax of 2.32% per annum). In other words, your capital is getting eroded.

Liquid funds—an alternative

A liquid fund is a mutual fund that invests only in money market and short term debt instruments whose tenure is generally less than 1 year. Its portfolio thus comprises instruments such as commercial papers, treasury bills, certificates of deposit, repos, etc. These funds aim at preserving the capital and yielding a conservative return by investing in shorter-term maturity papers, since they are less impacted by the interest rate movement.
At the end of last month that is Aug ‘06 the total amount of assets under management by liquid funds was in excess of Rs. 120,000 crore. This constitutes around 42% of the total assets under management by mutual funds.

Rate of return

Liquid fund:
The average one year compounded annualized return that this fund category clocked was 4.59% per annum. One month, 3 months and 6 months absolute returns stood at 0.465, 1.32% and 2.59% respectively.

Savings bank account:
The one year return on a savings bank account is approximately 3.5% per annum.

Returns –Assured

Liquid fund: A liquid fund does not offer assured returns as the returns depend on the instruments held in the portfolio.

Saving bank account: The returns here are assured.


Liquid fund:
In case you wish to redeem your holding, then, the funds are either credited to your account or a check is given within 24 hours of lodging the redemption request.

Savings bank account:
With the banking industry becoming more and more technology driven, funds lying in saving bank account are easily accessible. Even, after banking hours, one can withdraw funds from these accounts by using the ATM facility offered.

Minimum Investment Amount

Liquid fund: Depending on the scheme, the minimum investment amount can be as low as Rs.500

Saving bank account: Today, you have banks which are willing to open a savings bank account with as low as Rs. 100.

Over coming the ‘liquidity ‘drawback’

The above comparison indicates that one of the biggest drawbacks associated with liquid funds is the liquidity aspect. However, fund houses are working towards removing this handicap. For instance, Reliance Mutual Fund offers ‘Reliance Any Time Money’ card which enables the scheme investor to access and redeem his investment through ATMs. Further, this card can also be used to fund purchases at various merchant establishments world over. The amount withdrawn is treated as ‘redemption’ and the number of units that are held stand reduced accordingly as per the prevailing Net Asset Value (NAV). If funds are withdrawn before 3:00pm then the same day’s NAV will be applicable. If the funds are withdrawn after 3:00 pm then the next day’s NAV will be applicable. The maximum amount of withdrawal that can be undertaken is pre-determined by the fund house.

Further, several fund houses in the Western countries offer the Check Book facility against investments made in liquid funds. This facility was made available by a few fund houses in India, but was then discontinued..


Liquid funds are emerging as a strong alternative to saving bank accounts. However, if one fears a risk in liquidity, then a small portion of funds can be invested in the savings bank account and transfer the balance to liquid funds.