Fixed deposit, savings account, or liquid funds? How to be financially prepared in a pandemic

For those wondering where to save their money during a global crisis, here are some important pros and cons of savings accounts, fixed deposits, and liquid funds.

Fixed deposit, savings account, or liquid funds? How to be financially prepared in a pandemic

Having a steady supply of money at all times is a priority for all. These concerns are further amplified in times of crises. In the midst of the global COVID-19 pandemic, which is now turning into a worldwide economic catastrophe, parking funds in the right instrument is crucial. 

This could be the right time to revise your older financial strategies and redistribute funds to more secure tools. The three most common ways of storing money in India are savings accounts, fixed deposits, and liquid funds. Let’s analyse all three to gauge their suitability. 

Purpose

  • Savings account: This is something most people have by default in the form of a salary bank account. Although the interest rates are not high, savings accounts offer great flexibility and liquidity. No penalties are involved in withdrawing money. In the case of salary accounts, there are also no minimum balance criteria.
  • Fixed deposit: This is one of the most secure ways of saving money and comes with guaranteed returns. For a predetermined duration, the contributions of the investor earn a fixed rate of interest. These deposits are a long-term investment. Fixed deposit rates can differ from bank to bank. They work best for people looking for assured long-term gains without any risk. Tax saving fixed deposits come with a lock-in period, during which money should not be withdrawn. However, the owner can break the deposit as and when they want. Closing a fixed deposit before its maturity date can incur some penalty and result in a reduced rate of interest.
  • Liquid fund: These are a type of debt mutual funds that typically invest in low-risk securities such as treasury bills and government securities. The money is invested for a short duration – up to a maximum of 91 days. Investors can withdraw their money with ease within a day, whenever they wish. Just as the name suggests, these funds offer high liquidity.

Related: FM Sitharaman announces economic relief measures to quash coronavirus impact 

Returns

The sole purpose of investing money is to gain attractive returns that can help cover the cost of inflation and offer the investor a financially secured life. Liquid fund returns range between 7% and 9% for a financial year. This is the best of the three, as the returns from fixed deposits are in the region of 6%, while returns from savings accounts are mostly only 4%. If one were to consider inflation, returns from liquid funds would be at 5–8%, fixed deposits at 3.5%, and savings accounts at 2%.

Withdrawal

Withdrawal of money from savings accounts and liquid funds is quite straightforward and quick, and does not involve any penalties. Individuals can walk to a nearby ATM or use a cash slip or cheque and take out money from the bank. Liquid fund withdrawals have no lock-in period, so investors can redeem their money anytime. While bank ATM have a daily limit for withdrawals, there are no limits if the money is being withdrawn from the bank’s home branch using a withdrawal slip.  

Fixed deposits have a minimum lock-in period within which investors are not permitted to take out their funds. However, there are some provisions for emergency requirements. Individuals usually incur a penalty fee equivalent to 0.5%–1% of the rate of interest. However, each situation is unique, and so is the outcome. If a person is prematurely withdrawing the funds to invest in another investment instrument with the same bank, these penalty charges may be waived. 

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The verdict 

So which of these three – savings account, fixed deposit, liquid funds – is the best investment option during a pandemic? It may be hard to arrive at a clear answer to this question as every person’s financial needs and goals are different. Moreover, the fear tactics adopted by market competitors can coerce people into over-investing or taking incorrect drastic measures. 

One vital thing to note during a pandemic is that the economy is likely to slow down and hit a downturn. Many people and industries can be put out of work. In such times, it is crucial to have an emergency fund that can help cover urgent expenses like rent, loan repayments, insurance premiums, grocery bills, etc. Having a savings account with a minimum balance of Rs 1–2 lakh can be a good strategy. 

Ensuring liquidity is also important as it is hard to predict when and where the next expense can arise. The best feature of liquid funds is fluidity and easy accessibility. Liquid funds can be conveniently managed through mobile apps, so the withdrawal process is relatively quick. This can be a good option for those who are not in need of immediate funds. The invested money can grow over time, and if at all a crisis arises, one can have the funds back in their account in a day or two. 

Funds from linked fixed deposits too can be redeemed through net banking apps, but in order to enjoy the full interest and avoid penalties, fixed deposits work better as a long term investment. One can use a fixed deposit calculator to ascertain their profits. Such deposits can also double as a retirement savings account. At a time when people are bound to panic and misuse their money, fixed deposits offer a way out. With a lock-in period in place, your money remains secure for the future. 

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Last words

At a critical time like the ongoing lockdown, people should be careful not to panic and mismanage their money. The market always picks up after a lull. So, even though things may seem bleak right now, they are bound to get better. Just make sure to pick a tool that aligns with your requirements. Here's how to prepare yourself financially during a pandemic.




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