Most people leave their extra money in a savings account because it feels safe and easy. But with low interest rates, that money isn’t really growing, it’s just sitting there, losing value to inflation.
Following the Reserve Bank of India’s (RBI) decision to cut the repo rate by 50 basis points, i.e., from 6% to 5.5%, several leading banks have slashed their savings account interest rates. The State Bank of India (SBI), the country’s largest lender, has brought its rate down to a flat 2.5% per annum across all balances, effective June 15, 2025. HDFC Bank followed suit with a uniform 2.75%, starting June 10, and ICICI Bank did the same from June 12.
Now let’s be honest, with prices rising and your money earning just 2.5% or 2.75%, that doesn’t do much for your wallet.
SO, WHAT’S THE ALTERNATIVE?
One increasingly popular option is liquid funds — a low-risk, short-term investment that gives your idle money a chance to earn better returns without compromising on access or safety.
To understand how they work and why they’re gaining traction, IndiaToday.in spoke to Kaustubh Gupta, Co-Head, Fixed Income at Aditya Birla Sun Life AMC Ltd.
WHAT ARE LIQUID FUNDS?
Think of liquid funds as the middle ground between a savings account and fixed deposits, but with more flexibility and usually better returns.
“Liquid funds are open-ended mutual fund schemes that invest in debt and money market securities with maturity of up to 91 days,” explains Gupta. “These include Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs), CBLO and similar instruments.”
These funds are designed to serve as a short-term parking solution for your surplus funds, while offering reasonable returns. Because these funds invest in high-credit-quality instruments with short maturity periods, the risk of default or losing money is very limited, noted Gupta.
DO THEY REALLY OFFER BETTER RETURNS?
In most cases, yes. “Liquid funds are more responsive to the market and adjust their holdings with interest rate movements, unlike savings’ accounts which offer fixed, lower returns,” says Gupta.
While returns aren’t guaranteed, the numbers speak for themselves. Over the past one and three years, liquid funds have delivered average annualised returns of 7.3% and 7% respectively. Compare that to 2.5–2.75% in a savings account, and the difference is clear, pointed out Kaustubh Gupta.
In short, liquid funds help your money keep pace with inflation, something most savings accounts fail to do.
ARE THEY SAFE?
A valid concern, especially when it comes to short-term cash.
Gupta reassures, “Liquid funds have become a go-to choice for many looking to park idle cash. With their focus on high-quality, low-risk short-term debt, they offer not just safety, but better returns than your average savings account – all without locking away your money.”
HOW QUICKLY CAN YOU GET YOUR MONEY?
This is where liquid funds shine. They offer high liquidity, allowing redemptions within one working day (T+1).
“Investors can further take advantage of an instant redemption facility to redeem up to Rs 50,000 per scheme per day through online mode on a T+0 basis, bringing liquid funds at par with savings bank accounts,” Gupta noted.
“There’s no lock-in,” he points out. “Withdrawals can be made any time, making them ideal for managing short-term needs.”
However, while redemptions are continuous, short exit loads may apply if withdrawals occur within the first seven days, pointed out Gupta.
SHOULD YOU CONSIDER SWITCHING?
If you’ve got money sitting in your savings account that you don’t need immediate access to, liquid funds are certainly worth considering.
Gupta explains, “They’re ideal for investors with short-term goals, ranging from a few days to a few weeks, who want better returns without giving up too much liquidity.”
“Liquid funds are suitable for those willing to accept minimal risk for potentially higher returns than a traditional savings account,” he added.
In other words, it’s easy to overlook your savings account’s performance — until you realise it’s barely keeping your money afloat in today’s economy. Liquid funds offer a chance to change that, giving you better returns, without taking big risks.
(Disclaimer – This article is for general informational purposes only and does not constitute financial advice. Readers are encouraged to consult a certified financial advisor before making any investment or financial decisions. The views expressed are independent and do not reflect the official position of the India Today Group.)
Tune In