Are liquid funds a good option as bank saving interest rates drop?

Highlights

• Liquid funds are a type of mutual funds
• They offer higher interest rate than your savings bank account
• The money can be withdrawn within a day in case of an emergency 

Interest rates of savings bank accounts may be dropping because of banks in India are flush with deposits on the back of demonetisation. However, there is an option of investing in liquid funds to keep your money earning a good rate of return while being 'liquid' at the same time. 

What are liquid funds

Liquid funds are short-term debt mutual funds where an investor has the option to park one's fund for few days or months and earn returns for the holding period as per market rates. Liquid funds provide average returns of 7-8%, which is higher than what even many FDs today provide. 

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Liquid funds are invested in short-term money market instruments such as Government treasury bills, money markets, short term corporate deposits, commercial papers, etc. This makes them very liquid and safe. Moreover, there is no exit load applicable for such a fund.

Ajit Narasimhan, Head - Savings and Investments, Bankbazaar.com, said, "Today, most people maintain our contingency fund in a savings bank account or a fixed deposit. Either of these are easily accessible and can be liquidated when needed. However, keeping this money in a liquid fund instead will provide you higher returns compared with a savings account. Moreover, liquid funds also provide good liquidity of as little as a day."

How can you redeem the money?

To redeem your money, all you have to do is to place a redemption request and the accumulated money accumulated gets credited to your bank account the very next working day. 

There is also the convenience associated with investing in liquid funds. It is possible to invest in liquid funds completely online without any offline paperwork or wet signatures. 

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You can compare the different funds and choose the one you think suits you the best. You can fill in and submit the application form online. The entire verification is eKYC-based, and happens within a matter of minutes once you approve, as explained by Narasimhan. 

Basis your approval, money can be transferred to the fund from your bank account, and your liquid fund is set up in a matter of minutes.

Hence, start keeping your money in liquid funds and earn better interest than savings account.