Bank vs Mutual Fund
The Best Place to Keep Your Money for Every Goal
In today’s complex financial landscape, selecting the right place to park your surplus funds is crucial. Whether you’re an individual investor, a salaried professional, or a business owner, understanding the key differences between various financial instruments like current accounts, liquid funds, savings bank accounts, low-duration funds, fixed deposits (FDs), and short-term debt funds can significantly enhance your wealth management strategy.
In this article, we’ll compare the following pairs:
Current Account vs Liquid Fund
Savings Bank Account vs Low Duration Fund
Fixed Deposit (FD) vs Short-Term Debt Fund
We’ll evaluate them based on returns, liquidity, risk, taxation, and ideal use cases to help you make an informed decision.
✅ 1. Current Account vs Liquid Fund
🔹 What is a Current Account?
A current account is a bank account primarily designed for businesses or entities that have frequent banking transactions. It offers:
No limit on transactions
Overdraft facility (optional)
Zero or minimal interest
🔹 What is a Liquid Fund?
A liquid fund is a type of debt mutual fund that invests in short-term money market instruments like treasury bills, commercial papers, and certificates of deposit with maturities of up to 91 days.
🔍 Comparison Table
| Feature | Current Account | Liquid Fund |
|---|---|---|
| Target Audience | Businesses | Individuals and businesses |
| Interest/Returns | 0% or negligible | 5.5% – 7% p.a. (market-linked) |
| Liquidity | High (instant access) | High (redeemable within T+0 or T+1) |
| Risk | None | Low (but not zero) |
| Taxation | No tax | STCG/LTCG as per the holding period |
| Regulation | Regulated by RBI | Regulated by SEBI |
| Best For | Daily business transactions | Idle surplus cash for short durations |
📈 Verdict:
If you are a business looking for frequent transactions and overdraft facilities, a current account is essential. However, if you have idle funds, parking them in a liquid fund offers better returns with relatively low risk and high liquidity.
✅ 2. Savings Bank Account vs Low Duration Fund
🔹 What is a Savings Bank Account?
A savings account allows individual depositors to park their savings while earning modest interest. It allows:
Limited free withdrawals
Interest of ~3% to 4% p.a.
🔹 What is a Low Duration Fund?
A low duration fund is a debt mutual fund that invests in instruments with a Macaulay duration between 6 to 12 months. It aims to deliver better returns than a savings account with moderate risk.
🔍 Comparison Table
| Feature | Savings Account | Low Duration Fund |
|---|---|---|
| Interest/Returns | 2.5% – 4% p.a. | 6% – 8% p.a. (market-linked) |
| Liquidity | Instant access | T+1 or T+2 days |
| Risk | Almost zero | Moderate (subject to interest rate risk) |
| Taxation | Taxable as income | Taxed as per STCG/LTCG norms |
| Minimum Balance | Required by banks | Typically ₹500 – ₹5,000 (varies by fund) |
| Best For | Emergency cash, regular expenses | Parking funds for 6–12 months |
📈 Verdict:
A savings account is ideal for daily use and emergencies, but a low-duration fund offers significantly higher returns for surplus cash not immediately required.
✅ 3. Fixed Deposit (FD) vs Short-Term Debt Fund
🔹 What is a Fixed Deposit (FD)?
A fixed deposit is a traditional bank product offering a fixed interest rate for a fixed tenure, generally between 7 days to 10 years. Returns are guaranteed but not flexible.
🔹 What is a Short-Term Debt Fund?
A short-term debt fund is a mutual fund investing in debt and money market instruments with durations ranging from 1 to 3 years. It is a good option for investors seeking better returns than FDs with reasonable liquidity.
🔍 Comparison Table
| Feature | Fixed Deposit (FD) | Short-Term Debt Fund |
|---|---|---|
| Returns | 5.5% – 7.5% (fixed) | 6.5% – 8.5% (market-linked) |
| Liquidity | Premature withdrawal penalty | T+1 or T+2 (some exit load may apply) |
| Risk | Very Low (up to ₹5L insured by DICGC) | Moderate (interest rate and credit risk) |
| Taxation | Taxed as income (no indexation) | STCG/LTCG (indexation benefits on LTCG) |
| Tenure | 7 days to 10 years | Typically 1 to 3 years |
| Best For | Risk-averse investors with fixed goals | Investors seeking better post-tax returns |
📈 Verdict:
While FDs offer security and fixed returns, short-term debt funds can provide higher returns and tax efficiency, especially for investors in higher tax brackets.
📊 Summary Table
| Comparison | Best For | Liquidity | Returns | Risk | Tax Efficiency |
|---|---|---|---|---|---|
| Current Account | Businesses with daily transactions | Very High | Nil | None | Not Applicable |
| Liquid Fund | Idle surplus for a few days/weeks | High (T+0/T+1) | 5.5%–7% | Low | Moderate |
| Savings Account | Daily use and emergencies | Very High | 2.5%–4% | None | Low |
| Low Duration Fund | 6–12 month investments | Moderate (T+1) | 6%–8% | Moderate | Higher (STCG/LTCG) |
| Fixed Deposit | Conservative, fixed-income investors | Low (penalty) | 5.5%–7.5% | Very Low | Low |
| Short-Term Debt Fund | Medium-term capital parking (1–3 yrs) | Moderate (T+1) | 6.5%–8.5% | Moderate | High (with indexation) |
🧠 Final Thoughts
The choice between these instruments depends on your financial goals, investment horizon, and risk appetite:
Choose current or savings accounts for operational needs and immediate liquidity.
Opt for liquid or low duration funds for better returns on idle or short-term funds.
Prefer FDs for guaranteed returns and capital preservation.
Pick short-term debt funds if you want better post-tax returns and can tolerate moderate risk.
📌 FAQs
Q1. Are liquid funds safe?
Yes, liquid funds are considered low-risk but not risk-free. They invest in high-quality short-term instruments.
Q2. Can I lose money in debt funds?
Yes, debt funds are subject to market risks, particularly interest rate and credit risk.
Q3. Is FD interest taxable?
Yes, FD interest is fully taxable as per your income tax slab.
Q4. Do mutual funds offer guaranteed returns?
No, mutual fund returns are market-linked and not guaranteed.