How do liquid funds compare to savings account?
Liquid MFs are usually considered as the safest bet among the mutual funds. This is the reason many people have been investing in liquid funds actively. Even some of the small business owners are using liquid funds to park their ideal cash to get more returns. As per the recent SEBI (Securities and Exchange Board of India), liquid funds are mandated to hold the securities with Macaulay duration of not more than 91 days. However, looking at the current shock witnessed by the investors due to IL&FS fiasco, people are now hesitant to park their money into liquid funds. Now they are thinking about whether parking money in liquid funds makes sense?
First of all, people should understand that liquid funds, or for that matter, any mutual fund is not completely risk-free. However, the severity of risk differs across fund categories. Though liquid MFs are one of the safest mutual funds, it does carry risk. But the severity of risk is certainly lower than other mutual funds. Equity and mutual fund market regulator SEBI is taking every initiative to reduce such kind of risks through regulatory policies. Recently, SEBI has permitted side-pocketing and notified norms for valuations. This would certainly help investors in the long-run.
The question still remains the same, are liquid funds safe enough to invest? Then the answer is yes, they are almost safe, but there are no guarantees attached to it. As the nature of businesses are changing and even the rating agencies are not able to cope with such changes, it is not advisable for small investors to take liquid funds as a substitute of savings bank account or even the bank deposits. However, this doesn’t mean that liquid funds are not suitable for anyone. It is certainly not for all, but eventually, it depends upon the person's risk profile. If someone considers himself/herself as a conservative or moderately conservative then certainly it is advisable to park your money in the savings bank account or bank deposits instead of a liquid fund.