When an emergency comes, there is one thing that really matters: getting your hands on cash fast! Be it an unexpected hospital bill, a busted pipe that needs fixing, or a temporary disruption in income.
Historically, Fixed Deposits have been the go-to for emergency savings. But liquid funds have stepped up as an alternative for those tricky short-term situations. These funds invest in short-term debt instruments and provide high liquidity.
Here is how liquid funds beat FDs when an emergency arises.
1. Faster and Easier Withdrawals
As mentioned in the introduction, one of the main benefits of liquid funds is that they let you get at your cash super quickly and choose the units you wish to liquidate. Loads of liquid funds offer instant redemption options, but with a catch-up to a certain daily limit.
FDs, on the other hand, are pretty inflexible. If you need to withdraw early, you have to break the whole FD, and that also attracts penalties.
2. No Penalty When You Need to Exit
Banks don’t make it easy if you need to pull your cash out early from a Fixed Deposit. They charge a penalty, which basically eats into the interest earned. This really limits the usefulness of FDs when you need to access your money unexpectedly.
Liquid funds, on the other hand, don’t do this. You can get your hands on the cash you need whenever you wish, without worrying about losing out on any returns that you have already earned.
3. Better Returns Over Short Periods
Liquid funds invest in top-notch short-term debt securities like treasury bills, commercial papers and certificates of deposit. Because of the way they work – with returns tied to the market, they often beat out savings accounts and even some FDs for short-term returns.
Returns vary, of course, but many of the best liquid mutual funds have actually done better than bank deposits after taxes.
4. Low Risk With High Stability
Safety is paramount for emergency funds. Liquid funds invest in instruments with very short maturities, reducing both interest rate risk and credit risk. Their portfolios are diversified across issuers, and regulatory guidelines ensure high-quality holdings.
FDs are also safe, but they are exposed to concentration risk, i.e., your entire emergency fund is parked with one bank.
While it is very unlikely, bank moratoriums or operational issues can sometimes temporarily block access to funds.
5. Better Cash Flow Management
Emergencies don’t follow a schedule, and financial planning has to account for uncertainty. Liquid funds help in cash flow management, especially for households and professionals with variable expenses. They allow partial withdrawals without disturbing the entire investment. This gives room for structured financial planning while keeping emergency money handy.
FDs require you to break the entire deposit even if you need only a small amount, disrupting long-term interest accumulation. Liquid funds don’t have this problem at all.
Final Thoughts
Liquid funds are a suitable option for building an emergency fund because they offer all the right things: they are accessible, and the returns are pretty predictable.
They are not meant for long-term wealth creation or value investing, because their purpose is clear: to cover short-term expenses.
It is seen that modern investors also like the transparency of liquid funds. Daily NAVs, portfolio disclosures and instant transaction updates give clarity. To make things even easier, digital platforms have made it a breeze to buy and sell liquid funds.
