Saving for future is something that every person with an income considers, be it for that new car you were dreaming about all your life, the new place, your child’s education or maybe you want another vacation with your spouse. The easiest solution that anybody opts for is the fixed deposits. Fixed deposit generally gets you 5-6% percent interest on the sum after tax. The bank ties down your money for a significant time and charges 0 to 1 percent as a fine if you are in need of money and break the fixed deposit before maturity. You put away, a large chunk of your savings and over time you see taxes and fines nibbling it away, all this time you can’t help but feel like a kid waiting in front of a glass display at store, parting with his favorite toy.
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Liquid funds make a great escape to this. You invest your money, without your money actually being locked in. With greater interest, about 8-9 percent on average, it gives more profit even after tax.
Liquid funds invest in government bonds and high credit rated companies (companies that will, no matter what, give back your money), that means the probability of you kissing your money goodbye is pretty close to nil.
In addition to this, Liquid funds engage your cash in better use, giving you better returns and less money in your bank account to spend. The more money you have in hand, the more you spend.
An investor looking for better returns prefers liquid funds over fixed deposit. So, why people do not invest more in liquid funds than fixed deposit if it’s more capable of giving profits? It actually simple, whenever people hear about investing in mutual funds, all they can think of the risk of losing their money due to unpredictability involving in the market. Most people are too afraid to test the waters, hearing all the sorry tales of people losing money in wrong deals. Additionally, people have never been advised properly by bank agents, because this works against their interest.
Why do people save money in Fixed deposits?
We interviewed around 50 people with more than 5 lac in Fixed Deposits (FD) to understand the reasons. The 5 key reasons people have are –
- Money stays safe in FD
- Bank pays very low return, FD pays better
- It’s convenient – just a few clicks and no paperwork
- Can get money whenever needed
- FD is like long term investment
- Dad told me
Unfortunately, these reasons are either myths or inefficient. Let’s take one at a time.
1. Money stays safe in FD
No doubt FD is one of the safest products available. The only risk is when the bank defaults/shuts down. Agreed, these are black swan events. But similar is the risk with some of the debt funds, namely Liquid funds. These are a collection of short term debts (less than 3 months) to Government, Banks and Large organizations. The risk with the Liquid fund is of interest rate and credit risk of the borrower. None of these may matter more than 1/2 % or 50 basis points in overall returns.
2. Bank pays very low return, FD pays better
FD pays 3.5-7.5% depending on the time for which money is deposited. This interest is subject to tax according to normal income tax. Post tax the interest would be ~ 2.5-5%. The bank interest (~4%) is also taxable beyond 10K of interest. Meaning if you have less than 2.5 in savings average over year, bank and FD are paying similar interests.
In fact, comparing saving account with FD is any way comparing two non-optimal options. Whether FD earns slightly more than saving or another way round, it doesn’t matter. The important thing to note is that neither of them earns interest higher than debt funds. Safest debt funds, Liquid funds have consistently given 1-2% higher returns than FD. The returns difference is even higher if you happen to take money out of FD before its maturity because it will cost you 1% penalty and lesser overall interest rates in FD.
3. It’s convenient – just a few clicks and no paperwork
– Indeed. But the same convenience is available for debt funds. You can create an account on a mobile app and save money with just one click! Groww helps you setup your account within 2 mins through its secure mobile app. Convenience can no longer be the excuse of losing money.
4. Can get money whenever needed
Of course, if you are willing to let go of the interest for which in the first place you did an FD. Again a debt fund would score better than FD for liquidity. There is no penalty for withdrawing money from certain debt funds and the money would be in your bank in just one day. In certain schemes (Reliance Money Manager) the money would come in just 10 mins.
5. FD is like long term investment
This is the biggest myth. If you consider inflation and the interest earned in FD, you will realize that FD is no investment. Your money is not growing in FD. For the long term, you should either choose equity funds (of course, advised by experts) or long term debt funds (if equity makes you nervous).
6. Dad told me
Well even my dad told me to put surplus money in FD. Then one day I asked him, why FD. The discussion brought out the above 5 key points and my dad was convinced that FD is not a wise option. What made him happier was my interest and savviness towards money!
After all, it’s your hard earned money! Why lose it to banks? Here are some of the top liquid funds you can consider investing in.