Liquid Funds vs a Savings Account

A liquid fund invests in debt maturing within 91 days. It is the standard vehicle for money you will need in weeks or months but do not want sitting idle.

How they compare

• Return: liquid funds typically track short-term money-market rates, usually above a savings account, but nothing is guaranteed.
• Access: redemption proceeds normally arrive the next business day; many schemes offer an instant redemption facility up to a limit.
• Safety: bank deposits carry DICGC insurance up to ₹5 lakh. A liquid fund has no such guarantee — NAV can fall, though sharp moves are rare.
• Tax: bank interest is taxed at your slab rate as it accrues; liquid fund gains are taxed only on redemption.

Overnight funds are a notch safer

If even 91-day paper feels like too much, overnight funds hold securities maturing in a single day — the lowest-risk category available. Returns are correspondingly lower.

Keep a real emergency buffer in the bank

Liquid funds are not a full substitute for cash. Keep enough in your bank account for genuine emergencies at any hour, and use liquid funds for the surplus beyond that.