Savings a/c returns drop post RBI rate cut: Where to park your idle ₹1 lakh

Business Standard

a day ago

If you're like many with money lying idle in your savings account, now is the time to rethink where you keep your funds. After last week's RBI repo rate cut, banks have started trimming down their savings account interest rates—and that directly impacts what your money earns.
HDFC Bank, for instance, has slashed its interest on balances above Rs 50 lakh from 3.25% to just 2.75%. And that's just the beginning—more banks are expected to follow suit. So if your Rs 1 lakh is sitting idle, it's likely earning less than inflation, effectively losing value over time.
But here's the good news: You can earn better returns without locking up your money or taking high risks. How? Through liquid mutual funds.
Why liquid funds make sense right now:
1. Higher Returns Than Savings Accounts
While savings accounts now offer meagre returns of 2.7% to 3.5%, liquid funds have recently delivered 6.5% to 7.4% annualised returns. That's more than double in many cases. Liquid funds invest in short-term debt instruments like treasury bills and commercial paper, making them ideal for short-term parking of funds without sacrificing returns.
2. Easy Access to Your Money
Need your money urgently? No problem. Liquid funds offer same-day or next-day withdrawals with no exit load after 7 days. Even if you withdraw within a few days, the penalty is negligible—making them nearly as liquid as a savings account, but much smarter.
3. Minimal Risk
Liquid funds are not risk-free, but they're considered one of the safest mutual fund categories.
Example: Let's say you leave ₹1 lakh in a typical savings account earning around 3% interest annually. After one year, you'd have about ₹1,03,000—just ₹3,000 more. Now, compare that to putting the same amount in a liquid fund that yields an average of 6.8%. At the end of the year, your money would grow to around ₹1,06,800.
That's a difference of ₹3,800—for doing almost nothing differently, except choosing a smarter place to park your money. Over time, this gap only widens, especially if you regularly park idle funds in a savings account instead of exploring better options like liquid funds.
"With interest rates dropping, your savings account will be earning you less than before. Liquid funds, on the other hand, offer easy access, minimal risk and higher returns. If you just need a place to park cash for the short term, liquid funds are the ideal place," said Harshita Singh of Value Research.
Moreover, Liquid funds almost never go down in value, even over short periods like a week or a month. For instance, data analysed by Value Research shows that a typical liquid fund, such as Kotak Liquid Fund, shows consistently positive one-week (99.78 per cent of the time in the last decade) and one-month (100 per cent of the time in the last decade) rolling returns.
On the other hand, a short-duration fund, such as Kotak Bond Short Term Fund, can experience brief dips in value, as seen in occasional negative one-week (15.8 per cent of the time in the last decade) or one-month (7% of the time in the last decade) rolling returns due to interest rate movements or credit events.
This stability ensures that the money earmarked for withdrawals is protected from market volatility, giving you peace of mind.
When not to choose a liquid fund:
You need your money within a day or two and don't want to worry about fund settlement timings.
You're unwilling to open a mutual fund account (which is fairly simple these days).
You're expecting fixed, guaranteed returns (liquid fund returns are market-linked, though relatively stable).