Liquid funds v/s sweep accounts: Which offers better returns?
What's the story
Liquid funds and sweep accounts are two popular investment options for those looking to park their short-term savings. While both provide liquidity and relatively low risk, they differ in terms of returns and features. Knowing these differences can help you make better investment decisions. Here's a look at the returns offered by liquid funds and sweep accounts, and how they differ.
#1
Understanding liquid funds
Liquid funds are a type of mutual fund that invest in short-term debt instruments with maturities up to 91 days. They provide higher returns than traditional savings accounts, making them an attractive option for parking surplus cash. Liquid funds usually yield between six to eight percent annually, depending on market conditions. They also allow investors to withdraw money anytime without penalty, making them highly liquid.
#2
Sweep accounts explained
Sweep accounts automatically transfer excess cash from a checking account into a higher-yielding investment option, like a money market fund or fixed deposit, at the end of each day. This way, you earn better returns on idle funds without losing access to them. The returns on sweep accounts usually range between three to five percent annually, depending on the bank's offerings and prevailing interest rates.
#3
Comparing returns: Liquid funds vs. sweep accounts
While liquid funds generally offer higher returns than sweep accounts, the difference can be significant depending on market conditions. Liquid funds have the potential to yield up to 8% annually, while sweep accounts typically yield three to five percent annually. However, it's important to consider that these returns are subject to change based on economic factors such as inflation and central bank policies.
Tip 1
Factors influencing your choice
When choosing between liquid funds and sweep accounts, consider factors such as risk tolerance, liquidity needs, and investment horizon. If you want slightly higher returns and can tolerate some market risk, liquid funds may be the way to go. If you want guaranteed access to your money with minimal risk exposure, sweep accounts may be more suitable for your needs.