Many people keep large sums of money in their traditional bank savings accounts. This practice brings peace of mind because the cash is completely safe and accessible at any moment. However, leaving lakhs of rupees sitting idle in a basic savings account for years actually results in incredibly poor long-term returns.
The Problem with Traditional Savings Accounts
- Low Interest Rates: Traditional bank accounts typically offer only around 2.5% interest per annum.
- The Tax Drag: This interest is fully taxable based on your personal income tax slab. After accounting for taxes, your actual net return drops to a meager 1.75% to 2%.
The Smart Alternative: Liquid and Arbitrage Funds
Instead of hoarding all your emergency cash in a bank account, a much wiser strategy is to keep only 1 to 2 months’ worth of expenses in your traditional savings account for immediate use. You can then move the remaining bulk of your emergency fund into specialized mutual funds that generate more than 3 times the returns of a savings account.
These funds offer low volatility, allow you to withdraw your money within 1 to 2 business days, and let you easily refill the fund whenever you have extra cash:
- Debt / Liquid Funds: These funds invest in stable, interest-bearing bonds. They are an ideal, low-risk substitute for a basic savings account.
- Arbitrage Funds: These are highly recommended for individuals sitting in higher tax brackets due to their tax-efficient structure.
Real Historical Performance
The data below outlines the steady compound annual growth rates (CAGR) / Avg. Annual Returns achieved by these funds across different time horizons, demonstrating far better efficiency than a 2% post-tax bank return.
Liquid Funds
| Scheme Name | Inception Date | 1 Yr (%) | 3 Yr (%) | 5 Yr (%) | 10 Yr (%) |
| Nippon India Liquid Fund | 18-03-1998 | 6.62 | 6.51 | 5.75 | 5.41 |
| Axis Liquid Fund | 05-10-2009 | 6.53 | 6.94 | 6.30 | 6.09 |
| Bank Of India Liquid Fund | 16-07-2008 | 6.52 | 6.95 | 6.32 | 6.05 |
Arbitrage Funds
| Scheme Name | Inception Date | 1 Yr (%) | 3 Yr (%) | 5 Yr (%) | 10 Yr (%) |
| Kotak Arbitrage Fund | 29-09-2005 | 5.83 | 6.86 | 6.24 | 5.87 |
| Invesco India Arbitrage Fund | 30-04-2007 | 5.82 | 6.76 | 6.27 | 5.76 |
| UTI Arbitrage Fund | 22-06-2006 | 5.77 | 6.80 | 6.06 | 5.75 |
The Bottom Line
When we shop, we aggressively compare prices online and negotiate to get the best value. We should treat our hard-earned savings with the exact same financial discipline. Every rupee should be working hard to generate the highest possible returns.
While the incremental daily difference might seem small, optimizing where you park your emergency cash adds up to a significant amount of money over the long term. Making this simple switch is a powerful, low-risk step toward true financial prudence.
Thank you & all the best…
We can help you plan & invest for any or all of your financial goals…email or call to book an appointment for a discussion – Robin@smartserve.co / 9916804769
Disclamer :
- All the above numbers and calculations are for illustration of the concept from historical data of the above mentioned fund. It is not a recomendation for the fund.
- Mutual funds are subjected to market risks, read all scheme related documents carefully Historical performance is purely for reference purposes and is not a guarantee of future results.. Please consult your financial advisor before investing.
- I am an AMFI registered Mutual fund distributer through NJ India (ARN 0155).
- Robin Jacob, ARN : 125193